Roaring Chinese Stocks Poised for Best Week in a Decade

By Jamie McGeever

A look at the upcoming day in Asian markets reveals intriguing developments.

Could this week represent a pivotal moment for Chinese President Xi Jinping, comparable to Mario Draghi’s memorable “whatever it takes” statement?

While only time will reveal whether the latest series of monetary, liquidity, and fiscal stimulus from China will ignite a lasting economic recovery, the surge in Chinese stocks indicates that investors are inclined to trust the government’s efforts.

At the very least, concerns regarding growth and inflation have subsided. With negativity around the near term lifted, the outlook appears significantly more optimistic, despite the ongoing fundamental and structural issues within China’s economy.

This positivity is complemented by a U.S. economy that seems poised for a "soft landing" and a central bank aiming to stay ahead in achieving this goal, enhancing the global economic landscape as well.

As a result, risk assets worldwide are responding favorably, with the MSCI World index reaching new highs recently.

In Asia, Shanghai’s blue-chip equity index has risen 10.8% this week, marking its largest weekly increase since December 2014. The broader Shanghai composite index has climbed 9.7%, with a close at this level on Friday representing its best week since November 2008. Meanwhile, Hong Kong’s benchmark index has seen a 4% increase on Thursday, pushing its weekly gains to 9%, the highest in 13 years. Additionally, an index tracking mainland Chinese property stocks soared by 16%.

However, potential profit-taking could dampen this momentum on Friday, especially with the quarter ending soon and the Chinese markets closed from October 1 to 7 for the Golden Week holiday.

While the current exuberance is understandable given the prior depressed sentiment and asset values, a cautious approach is advisable.

Though Draghi’s commitment in 2012 significantly mitigated the risks of a financial and political disaster in Europe—keeping bond yield spreads lower—the underlying policies did not resolve the eurozone’s severe economic issues. Similarly, the recent measures from Beijing may not entirely remedy China’s property slump, eliminate deflation concerns, or tackle its long-term demographic challenges. But these complexities can be addressed in due time.

On the horizon for Friday, an important economic indicator is Tokyo’s consumer price inflation for September, anticipated to reflect a notable slowdown in the annual core rate to 2.0% from 2.4%.

Additionally, minutes from the Bank of Japan’s July meeting revealed a division among policymakers regarding the pace of future interest rate hikes, highlighting uncertainty about when the next increase in borrowing costs will occur.

Key developments to watch that may influence Asian markets on Friday include:

• Tokyo inflation (September)
• Japan leading indicators (July)
• German unemployment (September)