Hong Kong: How far will China’s leaders go to prevent an equity bubble from forming? It’s becoming a key question for investors as mixed signals produce the wildest market in years.
Traders are hanging on every word out of Beijing for clues on how the government may want to manage this year’s world-beating rally. The new securities regulator chairman — who has played a leading role in stoking risk appetite — just downplayed the significance of last week’s rating cut, calling it “very normal” even though the market’s reaction showed otherwise. State-owned media chimed in, saying there’s no need to be concerned over margin trading. That’s after brokerages were instructed to minimise those very risks.
The result is that China’s most speculative stocks keep flipping between massive gains and losses, while insiders have started to cash in. The value of leveraged bets fell Thursday for only the second time since the Lunar New Year break, while daily turnover cooled after frequently exceeding 1 trillion yuan ($149 billion) this month. The ChiNext’s Friday gain saw the small cap index rise for a sixth straight week, the longest streak since 2015.
Hong Kong’s currency has hit the weak end of its trading band repeatedly over the past week, spurring intervention that’s cost nearly $700 million. Analysts say the city’s de facto central bank will spend at least another HK$50 billion ($6.4 billion) defending the peg before local borrowing costs move up sharply. The gap between Hong Kong and US borrowing costs remains wide, which means shorting the city’s currency is still a profitable trade.
Pegged to the US dollar since 1983, the Hong Kong dollar was dull for years before it fell to the lower end of its trading band in April last year.
Chart of the week
A bullish sign for Chinese stocks in Hong Kong: the Hang Seng China Enterprises Index formed its first golden cross since 2016, suggesting further gains ahead.