China stocks spike on benchmark hopes

Hopes for inclusion in an influential global benchmark have driven Shanghai higher.

Chinese stocks surged on Tuesday in the largest one-day gain in two months, propelled by increased optimism that they may soon be included soon in an influential global benchmark.

In China, the Shanghai Composite Index closed 3.3 per cent stronger, the biggest intraday move since March. The smaller Shenzhen Composite Index and the tech-focused ChiNext index were also sharply higher.

Elsewhere in Asia, Japan’s Nikkei Stock Average was up 0.7 per cent, Korea’s Kospi was up 0.5 per cent, and Hong Kong’s Hang Seng Index was up 1.2 per cent.

Analysts and investors were increasingly expecting that MSCI, the global index provider, will soon add mainland-traded Chinese stocks, so-called A-shares, in its Emerging Markets Index. Funds managing a total of some $US1.7 trillion track this benchmark globally. Traders are anticipating that MSCI’s inclusion of A-shares into the index will channel billions in passive asset-management money into China, lifting share prices.

A Goldman Sachs report released on Tuesday morning raised the likelihood of the stocks’ inclusion to 70 per cent from 50 per cent during MSCI’s expected decision mid-June, which helped boost market sentiment, traders said.

Goldman Sachs analysts said the China Securities Regulatory Commission appeared to have resolved investors’ concerns about having clear title to Chinese shares that they hold, known as beneficial ownership, and clarified rules about voluntary trading halts that had locked up roughly half the market in last summer’s rout.

In a sign that global investors were rapidly building positions on Chinese stocks ahead of MSCI’s decision, an exchange-traded fund in Hong Kong reported a net new inflow of 2 billion yuan ($US303.8m) on Monday. That followed 600 million yuan of inflows over the past week.

The flows came from large institutional investors, said CSOP Asset Management Ltd., which manages the CSOP FTSE China A50 exchange-traded fund that holds Chinese-listed blue chips.

“The institutions are clearly bargain hunting [for] blue-chips,” said Jacky Zhang, an analyst at BOC International.

The China CSI 300 Financials index soared 2.8 per cent. The surge mirrors the early stages of China’s bull market in 2014, analysts said, suggesting this could just be the start of a prolonged upswing.

“The market may have bottomed out in the short term,” said Deng Wenyuan, an analyst at Soochow Securities.

Trading volumes have been thin in Chinese markets, said Andrew Sullivan, managing director of sales trading for Haitong International Securities Group. That means purchases of stocks heavily weighted in the CSI 300 benchmark, such as financials, can easily move markets higher, he said.

In Japan, shares edged into positive territory after data showed industrial output in April rose for the second month. Production improved from a sharp drop earlier in the year despite earthquake damage to supply chains in southern Japan.

The Japanese yen weakened to 111.12 to the US dollar after a brief period of strengthening in the morning. A weaker currency helps exporters sell their goods at more competitive prices abroad.

The price of Brent crude oil continued to hover at about $US50.26 per barrel.

Dow Jones newswires