China's surprise 30 basis point interest rate cut propelled the CSI 300 , the country's flagship index, to a weekly rise of 21% after nine consecutive sessions of gains. Hong Kong's Hang Seng index, heavily weighted towards technology stocks, followed suit.
This marks a radical departure from the downward trend seen over the past three years, with the index now at its highest level since June 2022. Several key factors are worth highlighting. Firstly, the 30 basis point cut in China's key interest rate is significant, as previous adjustments were limited to around 10 basis points.
Secondly, the easing of property purchase restrictions in three major Chinese cities (Shanghai, Shenzhen and Guangzhou), as well as the central bank's announcement of a reduction in banks' reserve requirement and the possibility of to refinance mortgages, are measures that should stabilize a property market in decline since 2014 and offer borrowers the chance to renegotiate their loans on more favorable terms. The People's Bank of China estimates that these initiatives could generate more than $21 billion in savings for borrowers. The announcements boosted property developers and steel-related stocks, with notable rises for China Vanke (+32%), Beijing New Building Materials (+23%), Citic Pacific Special Steel Group (+21%) and Baoshan Iron & Steel (+17%).
David Kruk, Head of Trading at La Financière de L'Echiquier, sums up the situation: "This is one of the turning points of the year". With the CSI 300 at a 40% discount to the S&P 500 , after the powerful rally in the US market over the past two years, investors who have been heavily underweight Chinese assets could see an even sharper rebound.
Sector performance and European dynamics
Leading the pack, China's consumer staples sector index, the CSI 300 Cons Staple, posted an impressive 37% rise in five days. Spirits producers stood out in particular, with gains of 33% for Luzhou Laojiao, Shanxi Xinghuacun Fen Wine Factory and Wuliangye Yibin. The healthcare and technology sectors were not far behind, posting gains of around 30%, boosted by more favorable refinancing conditions. In addition, Chinese AI chipmakers Cambricon Technologies and Maxscend Microelectronics saw their shares reach the daily limit of a 20% rise, encouraged by government incentives to replace Nvidia processors with local solutions.
Outside the Chinese prism, these measures have revitalized Europe's mining sector, which has jumped 16% since its low point in early September, while luxury goods stocks are up 12%. It's worth remembering that these sectors are heavily exposed to China, reinforcing the idea of a positive correlation between Chinese and European markets.
However, there are shadows on the horizon...
The Chinese stock market is facing uncertainties, while investment prospects seem to be brightening. The Shanghai and Hong Kong stock exchanges are closed from October 1 to 7 for "Golden Week", China's national holiday. Although U.S.-listed ETFs such as FXI will remain available, the interruption of trading in China could have adverse repercussions.
On the other hand, a disruptive outcome to the US election and growing pessimism among foreign companies in the face of weak demand and regulatory challenges - at their highest since 1999, according to the American Chamber of Commerce in Shanghai - could quickly erase accumulated gains.
All in all, the situation in China remains one to watch closely. Future growth and employment indicators could provide crucial confirmation and serve as a barometer for future prospects.
