Sudden Rally in China Stocks Has Traders Scratching Their Heads

(Bloomberg) — Chinese stocks staged a sudden rally late on Tuesday, with several traders attributing the rebound to technical reasons in the absence of any fresh triggers.

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In Hong Kong, the Hang Seng Index climbed nearly 2% within minutes, after a seven-day losing run that was the longest since late 2021. About half of the stocks in the index were oversold according to one technical indicator as of Monday, the highest ratio since March 2022. The CSI 300 Index, benchmark for mainland shares, finished up 0.8% after erasing a loss of as much as 0.7%. The gauge was the most oversold since early June on Monday.

Speculation was rife as stocks jumped, with many market participants talking about the possibility of buying by state-backed funds. The CSI 300 gauge dropped in each of the last two weeks and previous incidents have shown that purchases by the so-called “national team” help slow losses. Some other traders cited a Caixin report from Saturday, which said China is considering stronger action to address risks from local government financing vehicles.

READ: Half of Hong Kong Stocks Are Oversold as Bear Market Takes Hold

“Most people I spoke to were quite baffled by the move this afternoon. There were all kinds of speculations but there has been no clear explanation,” said Willer Chen, senior analyst at Forsyth Barr Asia Ltd. But “it is also reasonable to see some technical rebound” given the steep losses recently, he added.

Meanwhile, foreign investors continued to sell onshore Chinese stocks on a net basis. They pulled out 6.4 billion yuan ($875 million) on Tuesday, extending a record selling streak to 12 days. Turnover for Chinese stocks was about 800 billion yuan on Tuesday, largely in line with the average for the month, according to data compiled by Bloomberg.

Tuesday’s moves also suggest that continued losses in Chinese stocks are making traders jumpy. Investor sentiment has deteriorated in recent weeks owing to dismal economic data, deflation fears, and a property market slump that’s now threatening a crisis in the shadow banking sector. A gauge of Chinese stocks listed in Hong Kong has plunged more than 11% so far in August, making it the worst performer among 92 global equity indexes tracked by Bloomberg.

The Hang Seng Index finished the session 1% higher. The Hang Seng Tech Index ended up 2%.

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