SHARE THIS ARTICLE Share Tweet Post Email

China’s stocks rose, with the benchmark index entering a bull market, after an unprecedented state rescue effort halted a $5 trillion crash and ordinary investors returned to the market.

The Shanghai Composite Index climbed 1.8 percent to 3,522.82 at the close, taking its advance from its Aug. 26 low to more than 20 percent. Gains on Thursday were led by brokerages, while turnover was the highest since Aug. 18. The Hang Seng China Enterprises Index rose 0.7 percent in Hong Kong at 3:16 p.m., extending a 17 percent advance since this year’s Sept. 7 low.

The government took extreme measures to shore up equities as a boom turned to bust in June, including banning major stockholders from selling shares, curbing short selling and directing state funds to purchase equities. While government-owned funds still influence the market, evidence of heavy intervention has dwindled as late-day rallies become less frequent. Margin debt is also rising, volumes have stabilized and companies favored by individual investors are leading the rebound.

“All the sellers who needed to sell have,” said Francis Cheung, a senior strategist at CLSA Ltd. in Hong Kong. “The government has successfully clamped down on short selling. So it is easier for market to go up, especially with anticipation that China will cut rates and do more stimulus." He said he favored interest-rate sensitive sectors such as banks, property and Internet companies.

Government Stimulus

To keep growth on track, the People’s Bank of China has cut its benchmark interest rate six times in the past year, to a record low 4.35 percent. The world’s second-largest economy grew 7 percent in both of the first two quarters of this year, in line with the government’s goal for this year, before the expansion slowed to 6.9 percent in the third quarter.

The Shanghai Composite entered a bear market on June 29, ending a 935-day long bull market -- the nation’s longest. The gauge is still down 32 percent from its June 12 high.

Credit Suisse Group AG China strategist Chen Li called the rally a “tradeable rebound,” fueled by liquidity rather than fundamentals. Foreign investors have not joined the buying because of concerns about the economy and earnings, Chen said in an interview in Shanghai on Thursday. The Shanghai gauge may rise to as high as 3,750 by the end of the year, the strategist said.

Net selling of Shanghai stocks through a link with Hong Kong reached 3.88 billion yuan ($611 million) at Thursday’s close, the highest level since July 8.

Industry Outperformers

Technology, financial and industrial companies have led the bull-market rebound, with gauges of the three groups jumping more than 25 percent on the CSI 300 Index since this year’s low. Utilities and energy producers have lagged behind, gaining less than 11 percent.

The financial index advanced 3.3 percent on Thursday, with six brokerages including Everbright Securities Co., Industrial Securities Co. and Western Securities Co. surging by the 10 percent daily limit amid speculation of state intervention.

Citic Securities Co., the biggest listed Chinese brokerage, gained 7.4 percent. The company recently raised the discount ratios for pledged securities in margin loans. The ratios for some stocks such as China Railway Group Ltd., Ping An Insurance Group Co., and Agricultural Bank of China Ltd. have been increased to 0.7 times from 0.5 times, meaning investors can obtain loans amount to 70 percent of the market value of these stocks from 50 percent previously, according to the brokerage’s website.

Trading volume in Shanghai was 97 percent above a 30-day average.

State Buying

“I suspect that the state or the state-backed funds are buying brokerage stocks and by doing that, they can quickly boost sentiment on the broader market,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co.

The Shanghai Composite jumped 4.3 percent on Wednesday after the central bank published five-month-old comments from governor Zhou Xiaochuan that said a link between exchanges in Shenzhen and Hong Kong would start in 2015. Traders also pegged the gains to optimism over China’s five-year plan to bolster the economy and use of the currency.

“The rally in financial stocks is signaling to some investors that the bull market is coming back,” said Zhao Bingtong, a Shenzhen-based trader at Guosen Securities Co. “Details on the nation’s five-year plan set the positive tone for the market with the Shanghai Composite breaking through the 3,500 level and luring more investors to join. The market may see some profit takers emerging though in the next few days and whether it will settle above the key mark is crucial in determining the course of the market.”