July 6, 2020 / 9:12 AM / a month ago

China's blue-chips vault to 5-year high on hopes of economic recovery, policy support

SHANGHAI, July 6 (Reuters) - China stocks closed higher for a fifth straight session on Monday, extending a robust rally, led by financial shares on hopes of a quick economic recovery, Beijing’s continued reforms in the capital markets and ample liquidity.

The blue-chip CSI300 index closed up 5.7% at 4,670.09 points, its highest since June 25, 2015, while the Shanghai Composite Index climbed 5.7% to 3,332.88 points, its highest since March 2018.

CSI300 posted its biggest one-day gain since Feb. 25, 2019, while SSEC logged its best session since July 9, 2015.

Margin lending increased as the rally unveiled, with the amount of outstanding margin loans used to buy stocks reaching 1.2 trillion yuan on Friday, the highest since end-2015.

Financial shares led the charge on Monday, with the CSI SWS securities index surging 9.8% to their highest level since November 2016.

“China has become a safe heaven for investors now, as the recent coronavirus outbreak in Beijing helps investors realize the impact from a second wave of outbreak, if any, in the country would be very limited,” said Zhang Chengyu, vice general of Beijing-based Shiji Hongfan Asset Management Company.

“The rally now is just the beginning of a strong rising trend, and more money would pour into the A-share market,” Zhang added.

Adding fuel to the rally was a state media report saying China needs a bull market to build strength, reviving memories of a bull run in 2015 when authorities wanted a stocks-driven economic recovery.

Foreign investors have been a bellwether in purchasing A-shares recently. On Monday, they bought about 16.4 billion yuan ($2.33 billion) worth of A-shares via the Stock Connect, according to Refinitiv data.

Surging volumes, massive margin borrowings and a deluge of foreign money in China’s stock markets are pointing to another sizable run-up in share prices in the second half of 2020.

Policy easing and continued reforms in the capital markets, including a revamp for the benchmark Shanghai index and a registration-based IPO system for the start-up board, also helped shore up investor confidence.

Though some expressed caution following the stellar gains.

“While the sequential rebound in profits from the first quarter’s dire situation has been heartening, the prospects for year-on-year earnings growth cannot justify this exuberance,” Thomas Gatley, an analyst at Gavekal, said in a note on Monday.

Quality prices are rising far above levels implied by their historical relationship with earnings, he added. ($1 = 7.0341 Chinese yuan renminbi) (Reporting by Luoyan Liu and Andrew Galbraith; Editing by Shailesh Kuber)

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