China Shares Surge on Easing Hopes, but Fed Uncertainty Weighs

By Gregor Stuart Hunter and Brad Frischkorn 

        Chinese stocks surged Monday after Beijing signaled it can ease monetary policy to lift sluggish growth, with indexes in Hong Kong and Shanghai chalking up their biggest one-day gains in months.
        Capital flows into Hong Kong from China using the Stock Connect trading link were also heavy, reaching a record high after mainland mutual funds were approved to use the four-month-old program.
        The optimism flared after China's central bank governor Zhou Xiaochuan signaled over the weekend that China has "more room" to ease policy if inflation continues to slip. Lower interest rates would be a boon to the stock market, as many investors are using borrowed cash to pump funds into the rallying market, one of the world's top performers this year despite the slowing economy.
        The Shanghai Composite ended 2.6% higher, its biggest advance in more than two months, extending gains that have taken the index to a seven-year high. Hong Kong's benchmark Hang Seng Index advanced 1.5%, while the Hang Seng China Enterprises Index, a measure of Chinese companies with stocks trading in Hong Kong, surged 3.4% to the highest closing price in almost four years.
        Adding to the enthusiasm, Chinese officials fleshed some details over the weekend for plans to better connect the economy with the rest of Asia, Africa, the Middle East and Europe with more roads, railways, ports and other projects.
        Investors also focused on a ruling from the China Securities Regulatory Commission that said mutual funds can start using the new channel to invest in Hong Kong using the Shanghai-Hong Kong Stock Connect, which has seen disappointing volumes so far. Net inflows to Hong Kong totaled 2.56 billion yuan, representing 24% of the daily quota, and topping the previous record set on its launch day in November last year.
        The move was likely to help lift flows from the mainland, especially toward good quality companies that aren't listed in China, said William Fong, investment director for Asian equities at Baring Asset Management. But the additional tide of liquidity from China was lifting all boats. "The rally today is stronger than I expected," he said.
        More policy relaxation may yet come, according to CLSA head of China-Hong Kong Strategy Francis Cheung. "The biggest change to come will likely be the removal of the 500,000 yuan limit that mainlanders need to have in cash and securities to invest" in Hong Kong shares, he said.
        Other Asian stock markets benefited from the positive China moves, with Korea's Kospi index gaining 0.5%, and Taiwan's main bourse rising 0.2%.
        In Japan, stock-buying sentiment managed to recover after losing some steam in the wake of weak February industrial production data published before the market opened. Many experts took the data in stride on hopes for a recovery in both production and consumption from the April 2014 national consumption tax increase. The benchmark Nikkei Stock Average ended up 0.7%, snapping a two-day slide.
        Overall, regional markets shrugged off renewed uncertainty about the future of U.S. monetary policy after Friday comments by Federal Reserve Chairwoman Janet Yellen that raised the possibility that the Fed may not increase interest rates by midyear, as previously expected.
        Falling commodity prices, including a steep drop in crude futures in New York on Friday, did have an effect on Oceanic markets, however. Australia's S&P/ASX200 fell 1.3% while New Zealand's NZX50 lost 0.6%. In Japan, energy stocks were among the worst performers, falling sharply.
        "Worsening commodities prices remain a concern, especially from a broader deflationary perspective," said Tatsunori Kawai, chief strategist at kabu.com Securities.
        Jacky Wong contributed to this article.
        Write to Gregor Stuart Hunter at gregor.hunter@wsj.com and Brad Frischkorn at bradford.frischkorn@wsj.com
        (END) Dow Jones Newswires

        March 30, 2015 05:42 ET (09:42 GMT)

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