China stocks hit 2-year high on hopes of coronavirus-linked stimulus

Chinese stocks closed at a two-year high on Thursday, roaring back from a coronavirus-driven sell-off as investors prepared for more relief measures from Beijing.

Despite widespread disruption to supply chains in China, the country’s CSI 300 stock index gained 2.2 per cent on the day, making it the best-performing major stock market in the world. The index has gained nearly 3 per cent so far in 2020 while most other big global indices languish in the red. The S&P 500 is down 3 per cent and the FTSE 100 is off 1.6 per cent.

Shenzen’s smaller technology-focused composite index has performed even better, gaining 12 per cent this year, largely due to a rally in internet companies that benefit from enforced stays at home due to quarantine measures as well as speculative plays by momentum-driven retail investors. The Shanghai Composite, which includes more financial and industrial companies, trails well behind it with a rise of just 0.7 per cent this year.

Thomas Gatley, an analyst at Gavekal Dragonomics, said that as the extent of the economic damage becomes evident this month and the next, policymakers would likely “continue to drip-feed the market with announcements of additional monetary and fiscal stimulus”, pushing stocks higher despite “abysmal” expectations for corporate profits in the first quarter.

Analysts at Mizuho said comments from President Xi Jinping at a politburo meeting this week implied Beijing “had not yet given up” on its goal of doubling gross domestic product from 2010 by 2021. That would require growth of 5.6 per cent this year, they added, and lent credence to expectations of a “massive stimulus package” later in the year to make up for a collapse of growth in the first quarter.

But others warned investors might be expecting too much. “Because of the unique nature of the Covid-19 shock and limited policy space, we believe the scale of the demand stimulus package will be smaller and more concentrated in big cities” compared with previous sets of measures, analysts at Nomura wrote.

Analysts also cautioned that China was still at risk of an escalation in the outbreak, even though official numbers appeared to show the number of new cases levelling off. Robert Carnell, head of research for Asia Pacific at ING, pointed to risks from Chinese people returning to work and cases of the virus imported from other countries.

“Any of these, if not controlled properly, could result in another peak of Covid-19 in China and could move the market negatively,” he said.