Chinese stocks surge as the government's 'plunge protection team' goes all-in

Guang Niu/Getty Images
  • Chinese stocks have exploded higher upon the resumption of trade on Monday, adding to huge gains on Friday.
  • The surge in buying reflects the continued rollout of measures from Chinese policymakers to help support stocks and household spending.
  • The benchmark Shanghai Composite Index is currently on track to record its largest two-day percentage gain in over three years.

Chinese stocks are trading sharply higher on Monday, adding to mammoth gains achieved on Friday that were fuelled by a wave of supportive measures rolled out by Chinese policymakers.

As seen in the scoreboard at the mid-session break on Monday, all of the major mainland stock indexes have surged by between 3.9% to 5.2% in early trade on Monday.

Shanghai Composite 2,656.87 , 4.17%
SSE50 2,542.22 , 3.92%
Shenzhen Composite 1,326.45 , 4.96%
CSI300 3,272.97 , 4.40%
CSI500 4,342.03 , 5.19%
Hang Seng 26,077.21 , 1.98%
USD/CNY 6.5973 , 0.04%
USD/CNH 6.9342 , 0.02%

After jumping 2.76% on Friday, the benchmark Shanghai Composite Index has risen by a further 4.17%, putting the index on track to record its largest two-day percentage gain since early August 2015.

Today’s gain alone is the largest in percentage terms since March 2016, at least so far.

Investing.comShanghai Composite Daily Chart

All sectors are trading higher, led by telcos and technology stocks that jumped by 6% and 5% respectively.

Consumer cyclicals and staples, along with healthcare, financials, industrials and materials sectors, are also in favour with investors, climbing 4% or more.

Utilities and energy, with gains of 3.4% and 2.7% respectively, are the relative laggards for the session so far.

Yes, that’s laggards, not leaders. It’s been that kind of session so far.

On Friday, Chinese policymakers stepped up their efforts to ease concerns about the ongoing selloff in domestic stocks, particularly the forced selling of pledged shares that were used as collateral by some stockholders to obtain loans from brokers.

The head of China’s central bank, along with a number of chief financial regulators, each made pledges of support in an unusually coordinated display of positive rhetoric.

Yi Gang, the President of the People’s Bank of China (PBoC), said recent stock market declines had been driven by sentiment, rather than underlying fundamentals.

“Market volatility is mainly affected by investor expectations and sentiment,” Yi said in a statement posted on the PBoC’s website.

In response to the sharp selloff in stocks, something that saw the benchmark Shanghai Composite lose over 20% at one point from highs struck in late January, Yi said that “financial risk prevention and control has progressed”.

Yi added that “the economy continues to maintain steady growth”, a remark no doubt designed to help improve confidence following news the Chinese economy grew by 6.5% in the year to September, the slowest since early 2009, the height of the GFC.

Following the remarks from Yi, Liu Shiyu, Chairman of the China Securities Regulatory Commission (CSRC), also announced a series of support measures on the CSRC website on Friday.

Liu said the CSRC would promote reforms that free up listed companies to repurchase stock, help foster merger and acquisition activity and provide easier access for foreign investment.

If that wasn’t enough to entice buyers from the sidelines, Guo Shuqing, Chairman of China’s insurance and banking regulator, the CBRC, also announced that Chinese insurance companies would be allowed to offer products that ease liquidity concerns for companies that have pledged their own share capital to raise debt.

While those factors not only help explain the enormous surge in stocks on Friday but also today, sentiment has been further boosted by news of additional tax deductions announced by policymakers over the weekend that could save taxpayers tens of thousands of yuan a year.

According to the South China Morning Post, under the proposals released by State Administration of Taxation on Saturday, people will be able to claim deductions for six types of expenses in addition to the existing ones for pension and insurance contributions, and the universal personal allowance of 5,000 yuan (US$720) a month.

The deductions, if approved, will allow homeowners, renters, parents and those with “serious” illnesses to deduct their expenses against their taxable income.

The move comes on top of already announced personal income tax cuts from the government in August, and helps explain the surge in consumer-related stocks on Monday.

Chinese stocks will resume trade at 4pm AEDT.

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