China stocks climbed to a near 11-month high on Monday morning, as investors bet a weaker yuan will push up inflation and benefit Chinese exports, boosting demand for cyclical shares.
But gains in the Hong Kong market – more vulnerable to global capital flows – were more subdued, capped by fears that U.S. dollar strength and rising U.S. bond yields since Donald Trump’s presidential election victory could accelerate fund outflows from emerging markets.
Both China’s blue-chip CSI300 index and the Shanghai Composite Index gained 0.9 percent in morning trading, to 3,446.87 points and 3,220.27 points, respectively.
The strength in the main indexes, both of which are reaching their highest levels since early January, contrasts with the lacklustre performance recently in China’s growth board ChiNext , which was roughly flat by the midday break.
Such a divergence mirrors the recent trend on Wall Street, where banking and infrastructure stocks have outperformed high-tech plays since Trump’s election win, but investors say China has its own logic.
Modestly-priced cyclical shares have increasingly drawn liquidity flowing out of China’s property and bond markets.
“There’s a lot of money seeking investment opportunities as property purchases have been restricted, while the bond market looks creaky,” said Wu Kan, Shanghai-based head of equity trading at investment firm Shanshan Finance.
“Valuation in cyclical stocks is relatively low compared with growth shares, and the sector could be bottoming out, making them attractive targets for investors.”
Supporting such a view, Wu pointed to bullish commodity prices recently, and recent data showing China’s economy is stabilising, and “could be on the path to recovery.”
Shenzhen-based asset manager Windsor Capital is also optimistic, saying the inflation expectations in the backdrop of persistent yuan weakness will continue to ferment, while the upward trend in cyclical stocks is still in good shape.
A weak yuan would aid Chinese exports, as well as Beijing’s push to sell the country’s infrastructure capability abroad.
The infrastructure sector jumped more than 2 percent on Monday, while utility stocks – seen by many as a replacement to fixed-income investment- were also strong.
In Hong Kong, the Hang Seng index added 0.3 percent, to 22,401.67 points, while the Hong Kong China Enterprises Index gained 1.2 percent, to 9,461.58.