Why China’s A-share market is starting to look like a safe haven

Chinese A shares are in the spotlight. Following a strong performance in June, the A-share rally has gathered pace this month, surging past its pre-virus high in January.

What drove this exuberant burst of market optimism? Many observers have pointed to a front-page editorial by the state-run China Securities Journal about the importance of fostering a healthy bull market in A shares as the country recovers from the pandemic. The market has also got a boost from China’s successful containment of Covid-19 infections as well as its continuing economic recovery and supportive policies.

Despite worries about a second wave of infections after reports of a fresh outbreak in Beijing in mid-June, the outbreak appears largely under control in China. Daily new cases have dropped into single digits in the past two weeks.

At the same time, China’s economic recovery is well on track with second-quarter gross domestic product growth returning to positive territory in year-on-year terms. The improvement in growth momentum can also be seen in other high-frequency indicators such as sales of new homes and heavy-duty trucks.

Policies have bolstered the recovery too. Overall fiscal support, especially in funding support for infrastructure investment, is likely to exceed that during the 2015-16 easing cycle. The People’s Bank of China has also maintained its dovish stance and rolled out more targeted easing to support small and medium-sized enterprises by lowering the relending and rediscounting rate on July 1.

More recently, investor sentiment has turned rosier. Both the daily turnover of A shares and the margin financing balance have risen sharply since the start of July, to in excess of 1.5 trillion yuan (US$214 billion) and 1.2 trillion yuan, respectively, for the first time since the 2015 stock market bubble.