Chinese stocks went parabolic on Monday

John Gay/US Navy

Making Friday’s 2%-plus rally look like chump-change, Chinese stocks ripped higher on Monday with most mainland indices posting gains in excess of 4%.

While weak Chinese trade and inflation data released over the weekend likely contributed to the rally – presumably on hopes for further monetary stimulus from the PBOC – it appears that reports of additional reforms to Chinese state-owned enterprises may have been the catalyst to spark the acceleration in buying momentum.

According to the state-run China Daily newspaper, citing a report from the South China Morning Post, China’s state council approved a long-awaited blueprint to overhaul state-owned enterprises (SOEs) over the weekend.

The shake-up, which aims to put greater distance between government and the day-to-day commercial operations of state firms, will include setting up two new companies that will channel funds to SOEs and pressure them to turn a profit, said the newspaper citing an unnamed source.

The “State-owned capital operating companies”, akin to Singapore’s Temasek, would allocate state funds to monopolistic SOEs in mission-critical sectors, and mainly manage SOEs’ stock rights rather than directly run market-driven industries, said the report.

While purely speculative at this point, the news certainly put a rocket under Chinese stocks with the benchmark Shanghai Composite index – that brimming with firms operating in traditional sectors including many state-owned enterprises – rocketing higher by 4.93%.

The increase, the largest in percentage terms since July 9, took the two-day rally to a remarkable 7.29%.

Fitting with the broader index, all sectors finished with gains in excess of 3% with telecoms, up 9.5%, the best overall performer.

In Chinese markets individual stocks and sectors, and as a result broader indices, cannot rally more than 10% in any one trading session.

Apart from the hefty gains for telcos, all bar consumer discretionary and financials posted gains of more than 5%.

Unsurprisingly, the surge in Shanghai was mirrored, and in some cases exceeded, in other mainland indices.

The SSE 50 – comprising of the 50-largest stocks by market capitalisation in Shanghai – jumped 4.56% while the CSI 300 – containing large-cap stocks listed in both Shanghai and Shenzhen, put on an equally-impressive 4.54%.

Even small-cap stocks, those that would not necessarily benefit from state-owned enterprise reforms, were in favour with investors. The CSI 500 and Shenzhen Composite finished with gains in excess of 4.5% while the technology-laden ChiNext index surged by more than 5.5%.

You can read more the rumoured SOE reforms here.

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