Xi’s pledge bolsters hopes of jaded Chinese stock traders

(Bloomberg) – Chinese stocks rebounded from a two-year low after President Xi Jinping made a bold pledge to boost infrastructure construction in a bid to revive the economy.

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A late surge saw the CSI 300 index end Wednesday’s session with a 2.9% gain, its biggest since March 16, as Xi said all efforts should be made to boost government spending. infrastructure. Signs that authorities are beginning to bring the two Covid-19 outbreaks in Shanghai and Beijing under control have also fueled optimism.

Wednesday’s rally came even as traders grew increasingly indifferent to verbal promises from Beijing, as recent political pledges failed to lift stocks. Doubts remain as to whether today’s rally marks the start of a more sustainable rise in the CSI 300 – one of the world’s worst performing equity indicators this year with a loss of 21%.

READ: Skepticism lingers in China’s stock market over lockdown risks

Political promises have failed to enthuse traders who say the markets’ main concern is the strict Covid-zero restrictions imposed by China. Strict lockdowns across the country are hurting business confidence and disrupting supply chains, but senior officials have shown no sign of backing away from that stance.

What Bloomberg Economics says:

“President Xi Jinping’s promise to increase infrastructure construction is the latest sign that more stimulus is on the way. China has the firepower. The problem is that lockdowns and other brakes on virus activity hamper political support and depress sentiment A major confidence boost is needed A clear roadmap out of Covid Zero is what is needed to turn the economy around.

— Chang Shu and David Qu

Stocks’ rise on Tuesday on the People’s Bank of China’s plan to support small businesses didn’t last all day, with the benchmark CSI 300 closing down 0.8%. That was on top of the 4.9% drop the day before, which was the biggest in more than two years.

Traders also ignored the securities watchdog’s call on April 21 for institutional investors such as the National Social Security Fund to increase equity holdings. Shares also fell on April 19, when the PBOC announced 23 support measures. All major Chinese equity indicators have now erased the instinctive rally spurred by a series of political vows in mid-March.

“The market is no longer reactive as there is no easing from the negative in sight right now,” said Yang Ziyi, fund manager at Shenzhen Sinowise Investment Co. “We just have to wait. We have seen the same kind of numbness towards vocal support during the bubble burst of 2015 and in 2018.”

READ: Xi calls for ‘All Out’ infrastructure push to boost economy

‘Impossible Trinity’

Shares of Chinese infrastructure companies rallied on Wednesday following Xi’s pledge. The smaller, high-growth ChiNext index climbed 5.5%, its highest level since March 2016.

The deluge of verbal promises drew comparisons to the events of October 2018, when stocks slumped amid the U.S.-China trade war and concerns over domestic deleveraging.

Despite the initial boost, profit taking soon began and stocks hit new lows less than two months later. Historically cheap valuations pulled the market out of the doldrums in 2019.

“A revelation has struck traders that Chinese policymakers face an impossible trinity of goals here: they will miss the 5.5% growth target and will limit the amount of leverage in their system and will also have a zero-Covid tolerance policy,” Eli Lee, head of investment strategy at Bank of Singapore, told Bloomberg Television. “And that means, at the margin, the Chinese renminbi and equities thesis is weaker.”

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