Domestic money powers China rally as overseas investors hold back

One of the many emerging markets benefiting from a global rally this year is China, which is outpacing European, US, and Japanese peers in local currency terms, the Financial Times reports. The CSI 300 benchmark has climbed 14.3% YTD after a sharp rebound since June, though doubts persist over the rally’s staying power.

Local investors are driving the surge, as they push into equities amid falling bond yields, lower deposit rates, and the collapse of property as a preferred asset class. Margin trading has jumped 19% in two months to RMB 2.2 tn (c. USD 308 bn) — the highest since 2015, though analysts say leverage is more contained than during the bubble that ended in a crash a decade ago.

Policy has laid the groundwork: State-backed funds staged coordinated share purchases earlier this year to stabilize valuations, and more market support followed after Beijing ordered insurers to boost equity exposure. Analysts say this liquidity backdrop is the key driver of the rally, even as deflation weighs on earnings, with producer prices falling 3.6% y-o-y in July.

But foreign investors remain on the sidelines, with Ping An Asset Management’s Vincent Che saying there has been no significant impact from foreign flows. These investors have favored Japan and Europe where FX-adjusted gains have been stronger. “I would much rather be focused on an earnings-driven market,” Lombard Odier’s Asia CIO John Woods said.

Derivatives markets also signal caution: The Hang Seng China Enterprises Index, which tracks mainland firms listed in Hong Kong, has rebounded 23% from its April low, Bloomberg reports. Yet implied volatility on ETFs tied to the gauge has dropped to a four-year low, showing little appetite to chase the rally.

Options pricing underlines the divide: Upside calls remain expensive, while downside hedges on the FTSE China A50 are “rarely” this cheap, according to Bank of America. Traders are also positioning for the expiry of the 90-day US-China trade truce, shifting to call spreads rather than taking an outright bullish approach.

MARKETS THIS MORNING-

Asian markets are mixed this morning, led by losses in Japan as the Nikkei fell 1.8%. On the flip side, Hong Kong’s Hang Seng Index is up 1.9%, while mainland China’s CSI 300 is flat, following a Shanghai Cooperation Organization regional security bloc meeting that saw China and India agree to become development partners.

THE CLOSING BELL: TADAWUL-

The TASI fell 0.3% yesterday on turnover of SAR 3.2 bn. The index is down 11.1% YTD.

In the green: DWF (+6.5%), ANB (+3.0%) and BSF (+3.0%).

In the red: Sabic Agri-Nutrients (-5.4%), Petro Rabigh (-5.1%) and Bawan (-4.5%).

THE CLOSING BELL: NOMU-

The NomuC fell 1.4% yesterday on turnover of SAR 39.3 mn. The index is down 17.6% YTD.

In the green: Adeer (+17.7%), Pro Medex (+16.1%) and Shalfa (+10.0%).

In the red: Naf (-24.7%), Al Ashgal Al Moysra (-18.0%) and Tibbiyah (-15.9%).

CORPORATE ACTIONS-

Al Ashghal Al Moysra Company’s board recommended doubling the firm’s capital to SAR 48 mn, it said in a disclosure to Tadawul (pdf) yesterday. The move would raise the number of shares to 4.8 mn from 2.4 mn by issuing one bonus share for each share held. The move is pending regulatory and shareholders' approval.

The Arab National Bank repurchased 10 mn of its shares for over SAR 218 mn at SAR 21.8 apiece, earmarking them for its employee share program, it said in disclosure to Tadawul yesterday.