Chinese speculators have a new obsession: stocks of the nation’s state-owned enterprises.
A rally in government-controlled banks is spreading to brokers and filmmakers as traders seize on policy support for the state sector to re-energize a market faced with fresh growth concerns.
A domestic index tracking some of China’s largest state-owned enterprises rose as much as 1.5% Tuesday to its highest in 15 months. Top gainers included China International Capital Corp., China Film Co. and Qinhuangdao Port Co., all hitting the 10% trading limit.
While some traders point to Beijing’s pledge to widen funding access for state firms as the main catalyst, there are concerns that the latest gains look frothy in the absence of strong business fundamentals. China’s so-called great ball of money tends to cause trading frenzies as it rolls among financial assets.
“Technically speaking the rally is definitely not healthy, as the fundamentals of the sector haven’t really changed much,” said Kakei Lam, fund investment officer at Metaverse Securities in Hong Kong. “Investors should be careful of profit taking in the short term.”
READ: Chinese Bank Stocks Soar, Adding $166 Billion in Trading Frenzy
The latest gains came with a sudden surge in trading volume, pointing to a rally driven mostly by momentum rather than fundamentals. Volume on the CSI 300 Index on Monday was the highest since June.
The CSI 300 Financials Index jumped as much as 2.5% Tuesday, on track for a six-day winning streak, the longest in four months. Brokerage firms led the pack, with some hitting the 10% daily limit. Bank of China Ltd. also jumped, taking its gain over past four sessions to about 27%.
Options activity also spiked on Chinese banks listed in Hong Kong. Trading volume on Bank of China’s options on Monday was about eight times its 20-day average, with call options more than double the amount of puts. On Tuesday, the most heavily traded option on the stock was a call that bets on the lender’s share price to jump to at least HK$3.6 from the current HK$3.4 by the end of this month.
While several Chinese lenders’ recent decisions to cut deposit rates have boosted appetite for the banking sector, banks as a whole posted a tepid set of first-quarter earnings and are facing deeper margin woes.
“We believe the rally is cyclical, not structural, as we expect the tangible impact of SOE reforms to be muted,” JPMorgan Chase & Co. analysts including Katherine Lei wrote in a Tuesday note. However, this can be a tailwind for bank valuations, they noted.
A gauge of major lenders in Shanghai and Shenzhen traded at around 0.6 time book value, compared with an average of 0.8 time in the past five years, according to data compiled by Bloomberg.
Positive Views
To some observers, the ongoing rally may still have legs.
“We think the A share market will lead in the next phase of the bull market in Asia. Price action in the aftermath of the Golden Week holiday is encouraging,” Morgan Stanley analysts Jonathan Garner and Laura Wang wrote in a note Tuesday, referring to China’s locally traded shares. “There was particular strength in financials and other SOE stocks.”
The analysts also listed a seminar to be held by the Shanghai Stock Exchange on May 11 as a catalyst for investors. The event carries the title “Exploring the investment value and promoting the valuation re-rating of central SOEs.”
Chinese state media also drummed up support for the latest rally. Strong earnings growth expected for the current quarter and historically low valuations indicate opportunities for investors ahead, China Securities Journal said in a report Tuesday, citing analysts.
--With assistance from Lianting Tu and Zheng Li.
(Updates with analyst comments and more data)