Chinese Stocks Gain as Upbeat PMI Data Reinforce Recovery Hopes

Chinese stocks rallied as a rebound in manufacturing activity reinforced hopes that the nation’s economic recovery may be starting to gain traction.

The benchmark CSI 300 Index rose as much as 1.7%, the most in a month, to lead gains in Asia. Most sectors except utilities and energy gained, while Hong Kong’s market was shut for a holiday.

Investors are turning more optimistic about the world’s No. 2 economy after China’s official manufacturing purchasing managers index registered the highest reading in a year, the latest economic green shoot alongside strong exports and rising consumer prices. The CSI 300 capped its first quarterly gain in a year after authorities rolled out a slew of measures to shore up growth and restore confidence.

“Emerging optimism about China is real,” said Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank in Singapore. It may gain traction given “corresponding optimism elsewhere in Asia that dovetails with an upturn in global manufacturing,” he said.

A private measure of China’s manufacturing activity also expanded in March, signaling that the industrial side of the economy is stabilizing. Major Chinese stock benchmarks have staged a strong comeback from their lows earlier in the year, also buoyed by Beijing’s resolve to end a $7 trillion rout and a return of foreign fund inflows.

The market still faces headwinds, including a continued slump in the country’s housing sector, as well as rising US-China tensions in areas such as technology.

The latest round of corporate earnings has also fueled caution among investors. Skepticism about the scope and depth of the earnings recovery resurfaced following disappointing results from sector leaders including BYD Co. and Wuxi Biologics Cayman Inc.

Still, “downside is certainly limited with decade-low valuations and allocation, which also leads to trimmed expectations for returns,” said Wendy Chen, an analyst at GAM Investments. “In 2024, we will see a more range-bound pattern for the overall China market, while investors will focus more on alpha generating opportunities.”