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China shares hit 13-year high on reforms and COVID success

Benchmark index responding to signs of economic rebound despite US tensions

Chinese shares are expected to continue surging despite uncertainty over debt levels and tensions with the U.S.   © Reuters

HONG KONG -- China's main stock market index closed at a 13-year high on Tuesday, helped by an economic resurgence after the nation managed to control the coronavirus pandemic and by market reforms that attracted foreign capital.

The CSI 300 index, which tracks the largest shares listed in Shanghai and Shenzhen, climbed 1.9% to 5,368.50, its highest close since Jan. 18, 2008.

Investor sentiment got a boost on Tuesday after the New York Stock Exchange reversed course on plans to delist shares of three state-owned Chinese telecom companies, with some investors viewing the move as a precursor to a de-escalation in tensions between China and the U.S., the world's two largest economies.

"The index run-up has been all the more remarkable because it has come amid very little volatility," said Hao Hong, head of research at BOCOM International in Hong Kong. "The economic revival and the country's ability to control the coronavirus have helped. But investors have been emboldened by the rapid reforms underway that are making it easier for companies to raise capital and global money managers to deploy capital."

The previous peak for China stocks was reached in June 2015 after investors borrowed heavily to buy into a rapidly rising market. However the surge was shortlived, with more than half the value of equities wiped out in the next six months.

The stock market rise this time comes despite pockets of risk building up in the nation's financial sector that threaten to undermine economic growth. These include record levels of corporate bond defaults and regulatory moves to clamp down on the fintech sector.

Investors, however, seem to believe authorities have the ammunition to contain such risks.

The CSI 300 index has surged 52% since its March trough. Hong and others expect the trend to continue, with Chinese corporate earnings set to climb as the economy is predicted to grow 8.2% this year, its fastest pace in a decade, according to a survey by Nikkei and Nikkei Quick News.

The stock benchmark is seen ending 2021 at 5,590, according to the mean estimate from a survey of three analysts and three fund managers on Dec. 22 by Nikkei Asia.

The index rally has been helped by China's move last year to do away with foreign-ownership caps in the futures, securities and mutual fund sectors as part of the opening of its financial services industry. Beijing has vowed to continue easing restrictions to its capital markets. This year it also gave overseas traders access to futures and options while scrapping quotas on foreign inflows.

A September survey by HSBC Qianhai Securities showed that nearly two-thirds of more than 900 global institutional investors and major corporations plan to increase their investments in China by an average of 25% over the next year.

Foreign ownership of Chinese shares hit a record 2.91 trillion yuan in August, up 38% from the start of the year, data from the central bank showed.

While global investors will have to factor in risks from high debt levels in China, as well as from U.S.-China tensions, money managers say mainland stocks promise higher returns.

Mainland-listed shares are forecast to return 6.3% annually on average over the next decade, as China's economy continues to expand, Leon Goldfeld, head of multi-asset solutions for Asia-Pacific at JP Morgan Asset Management, and Sylvia Sheng, a global strategist on the same team, said in November.

The figure compares with a 4.1% annual estimated gain for U.S. large caps and 4.6% for developed-world equities, they said.

"There is a clear case for greater portfolio allocations to China exposed assets for returns and diversification," Blackrock, the world's largest asset manager, said in its 2021 global outlook. "We expect persistent inflows to Asian assets as many global investors remain underinvested and China's weight in global indexes grows."

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