China stocks poised for muted reopen after Hong Kong’s surge

Chinese shares look poised for mild early gains on their return from a weeklong holiday, supported by a surge in Hong Kong-listed names and easing concerns about regulatory headwinds for the nation’s battered tech sector.

A U.S.-listed exchange-traded fund tracking the benchmark CSI 300 Index gained 1.6% this week, the most in about two months, while Hong Kong’s Hang Seng China Enterprises Index jumped nearly 3% on Friday in its first session post the Lunar New Year break.

The CSI 300 had fallen into a bear market amid a $1.2 trillion rout just before the holidays, as worries about a weak economy and the property sector’s debt woes outweighed Beijing’s monetary easing.

Given their weakening correlation with offshore markets, stocks on the mainland may struggle to keep up with any initial upward momentum unless policymakers take more steps to restore investor confidence, including stronger fiscal spending and further credit loosening. How China’s central bank will manage liquidity after its customary pre-holiday pump priming will also offer clues.

“The correlations of so-called A shares with offshore are waning, and as such offshore market conditions won’t determine their short-term direction,” said Hao Hong, chief strategist at Bocom International, referring to mainland stocks. “Even if at the open A shares are lifted due to the general buoyant sentiment during the Lunar New Year, I wouldn’t chase it and the technical bounce will be fleeting and untradable.”

Mainland traders will return from their long break facing challenges ranging from weak local manufacturing and housing data to an expanding camp of hawkish foreign central banks.

The monetary policy divergence between Beijing and Washington — touted as one key reason for global brokerages to turn bullish on Chinese equities — hasn’t yet led to any meaningful gains, with last month’s cut to a key interest rate failing to excite local traders. Concerted efforts among the securities regulator, state media and mutual funds to rally investor morale have also gone in vain.

“We would expect the Chinese markets to remain soft as they reopen,” said Gary Dugan, chief executive officer at Global CIO Office in Singapore. “Economic activity appears to have been hurt by ongoing and potentially more aggressive restraints given the omicron outbreak and the need to control pollution around the Winter Olympics.”

In currency markets, the onshore yuan is expected to play catch-up with other Asian currencies given the pull back in the greenback, likely opening stronger, according to Mitul Kotecha, chief emerging markets Asia & Europe strategist at TD Securities in Singapore. The yuan hit a record against a basket of peers last month.

Traders in the credit space are on the watch for signs of further stress among property developers, after at least two of them missed payments on public dollar bonds for the first time in January. They are also searching for clarity on funding problems, including potential asset sales and signs of policy support.

Apart from economic indicators like private-sector manufacturing activity and loan growth, one immediate focus will be on how much additional liquidity the People’s Bank of China withdraws from the financial system now that the seasonal surge in cash demand is over.

“While it has been the usual practice that the PBOC mops up the liquidity injected before the holidays, market may be hoping for only a partial withdrawal this time round, given the dovish monetary stance,” Frances Cheung, rates strategist at Oversea-Chinese Banking Corp.

She expects the yield on 10-year government bonds to move in a range of 2.6%-2.8% “on a multiweek horizon.”