The WSJ reports,"China's stocks are soaring as people scoop up investments in one of the world's cheapest markets, encouraged by signs Asia's biggest economy has turned the corner and is starting to motor again.
The Shanghai Composite Index jumped for a sixth day to the highest in nine months on Tuesday, bringing the gain to 6.6% so far in July and leaving the market in position to record its best month since December 2012. The index is catching up with a rally in Hong Kong that sent the city's main stock index to a three-year high last week.
An index of mainland companies traded in Hong Kong entered a bull market Monday, rising more than 20% from a low in March.
"People have given up on expecting China to collapse," said Arnout van Rijn, Asia-Pacific chief investment officer at Robeco Group in Hong Kong, which manages assets worth $290 billion. Mr. van Rijn increased his exposure to Chinese stocks this year.
Because of a slowing growth on the Chinese economy in the first quarter and H1,"for most of the year, Chinese stocks put in lackluster performances, missing out on a rally that swept through the U.S., Europe and most of Asia, as markets encountered a variety of bumps. In March, the country experienced its first default on a corporate bond, adding to fear that widespread credit problems could emerge as companies dealt with slowing economic growth.
Now, sentiment has turned around. Government measures unveiled in the past month are spurring optimism the economy will rebound, aided by overhauls aimed at debt-laden state-run enterprises. Banks are raising cash to help with bad loans.
Property prices are showing signs of stabilizing, and large developers are among the leaders of the stock rally.
Investors have moved in to take advantage of valuations driven lower by the downturn, leaving China's market among the cheapest in the world.
The Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, is currently trading at 7.2 times forward earnings, a common valuation measure, compared to an average 11.9 over the past 10 years and the current 16.6 for the S&P 500.
The recent rally has been led by widely-traded behemoths like PetroChina Co., China's largest listed oil company by capacity, which is up 23% year to date in Hong Kong."
The buying in China has been widespread. According to HSBC Holdings PLC, mutual funds now hold record amounts of Chinese equities. EPFR, a data provider, says Chinese equity funds recorded net inflows of cash in both June and July, reversing four months of outflows.
Local investors have bought as well as alternatives such as the property market have stagnated. Yields on wealth-management products, once popular as a source of high returns, have fallen sharply in recent months.
The optimism has spread to other markets as well. China's currency hit a three-month high this week, rebounding from a first-half tumble. The bond market, too, has rallied: Yields on top-rated corporate bonds were at 5.39% on Monday, down from 6.31% at the start of the year.
Not all investors are convinced. Paul Chan, Invesco's chief investment officer for Asia, excluding Japan, cut his allocation to Chinese equities to "underweight" from "overweight" for the first time in more than four years this month. Invesco has $802.4 billion in assets under management.
Mr. Chan says economic growth and increases in earnings per share in mainland China are likely to lag behind those in the rest of the Asian-Pacific region.
Other investors say a rapid accumulation of debt by China in recent years is still an overhang for the economy. Standard Chartered PLC estimates that total debt amounted to 251% of gross domestic product hit at the end of June. An additional concern is that China's recent efforts to stimulate the economy aren't sustainable, and that effects will only be temporary.
For now, though, investors are welcoming Chinese efforts to overhaul state-run companies. The government has allowed six to introduce pilot programs aimed at introducing more private investors and improving management".
