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Chinese stocks surge on expectations of government relief

Top officials offer new support, but analysts say economic fundamentals remain weak

Stocks have been hurt this year by the U.S.-China trade war and weaker economic growth.   © VCG/Getty Images

HONG KONG -- Chinese stocks soared more than 4% on Monday after top government officials over the weekend voiced strong support for the market and announced additional measures to boost the economy. The jump added to a smaller rally on Friday, which followed similar official comments that day.

The government has been concerned over the falling Shanghai stock market, which is down about 20% this year even after Monday's surge.

Chinese state media reported over the weekend that President Xi Jinping had offered his "unwavering commitment to the private sector." The China Daily quoted Xi as saying, "The historical contribution of the private sector cannot be written off, and the sector's position and role is beyond any doubt."

Chinese Vice Premier Liu He, meanwhile, noted that stock valuations were at historic lows. "The corrections and sell-offs on the stock market are creating good investment opportunities for the long term and healthy development of the stock market," he said, according to the China Daily.

Other measures to help investors include a proposed income tax cut for individuals, Chinese media said on Monday.

Late last week, top finance officials announced a series of steps to support China's struggling equity markets, with Liu Shiyu, chairman of the China Securities Regulatory Commission, saying that the government would "encourage" private equity funds to purchase shares in listed companies.

The comments have helped spark a two-day rally. The Shanghai Composite Index jumped 4.1% on Monday to close at 2,654.88 in its strongest gain since March 2016. This followed a 2.6% rise on Friday. The Shenzhen Composite Index rose even more strongly Monday, surging 4.9%.

In Hong Kong, the Hang Seng China Enterprises Index of large mainland companies listed in the city rose 2.6%, while the benchmark Hang Seng Index closed up 2.3%

The gains are "mainly a continuation of Friday's rebound following various state measures to support the A-share market," Kevin Leung, director of global investment strategy at Haitong International Securities in Hong Kong, told Nikkei Markets. The vice premier knew he "must say something to stabilize markets, and saying he recognizes that privately owned enterprises play an important role for economic growth is somewhat more useful to boost confidence than spending billions to rescue the A-share market."

Domestic stocks have been hurt this year by the U.S.-China trade war and weaker economic growth. The government reported on Friday that gross domestic product for the third quarter expanded 6.5%, a slower pace than expected.

Oliver Jones, markets economist at Capital Economics in London, said in a note last week that the Shanghai market will "weaken again given the outlook for China's economy and the U.S.-China trade war." He added that "further falls are likely to be much smaller than those of the past few months."

"Even though policymakers in China have loosened monetary and fiscal policy considerably recently in a bid to shore up the economy, past form suggests that this is unlikely to kick in and stabilize growth until around the middle of next year," he said.

Jones told the Nikkei Asian Review that the positive market reaction to supportive comments from policymakers was not a surprise, but that it did not "change the fundamental problem that China's economy is slowing and that the trade war with the U.S. is not going away."

Christopher Balding, associate professor at Fulbright University Vietnam and previously a professor at the HSBC Business School of Peking University in Shenzhen, told Nikkei that in "Chinese regulatory-speak," the term "encourage" could mean anything from a government mandate to less forceful policies.

He noted moves by the People's Bank of China to cut the share of cash that banks must hold on reserve in July and early October. "I think that is the primary channel they will be using rather than some type of fiscal-led stimulus," he said. Lending, he added, "remains the driver of the Chinese economy."

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