Chinese stocks just had their best week since 2008. After the government pumped a $114 billion stimulus into the market, the CSI 300 index, which tracks companies in Shanghai and Shenzhen, jumped 15.7% in a week.
This is the largest jump since November 2008, when China did something similar to fight a global financial crisis.
The rally pushed up European stocks and even industrial metals. Chinese leaders are doing everything they can to stabilize their capital markets, fix the property mess, and boost domestic spending.
They want to hit their 5% economic growth target for the year. This stimulus package is all about meeting that target.
$114 billion in liquidity
On Tuesday, the People’s Bank of China announced an Rmb800bn ($114bn) lending pool.
This is meant to help companies buy back their own shares and let non-bank financial institutions (like insurers) buy local stocks.
The idea is simple. Flood the market with liquidity and keep it moving. The CSI 300 index shot up 4.5% on the day this Friday.
Over in Hong Kong, the Hang Seng index rose 13% this week, its biggest surge since 1998 during the Asian financial crisis.
European luxury companies that rely on Chinese consumers saw the gains as a good sign, expecting more spending from China’s middle class.
On the U.S. side, things weren’t quiet either. Wall Street reacted positively, with the S&P 500 closing at record highs three times this week.
Investors saw the potential boost in global demand and started making moves. But some restrictions are still in place.
In August, Chinese authorities limited daily data flows from the Hong Kong Stock Connect program, which shows foreign investor activity in mainland stocks.
Frenzy in the markets
It’s not surprising that the trading floors have been crazy. Citi’s equities sales and trading team in Asia reported a record number of client flows into Hong Kong and mainland Chinese equities in the past three days.
David Chao, a global market strategist at Invesco, is betting the rally could continue. “Chinese markets are all about momentum,” he said.
He compared the current rally to the 2014-2015 surge when the Shanghai index jumped 150% before crashing back down.
But this time, the Fed’s interest rate cuts are weakening the dollar, and that could lead to more investors rotating out of the global tech sector into cheaper emerging markets like China.
The stimulus is also pushing up commodity prices across the board. Copper, aluminum, and zinc are all up. China is a massive consumer of these metals because of its manufacturing sector.
Copper has risen more than 5% since Tuesday, breaking through $10,000 per tonne, the highest it’s been in three months.
Iron ore also got a boost. Prices had hit a two-year low, driven by weak demand for steel. But now it’s bouncing back.
Oil, though, didn’t follow the trend. News that Saudi Arabia might increase output dampened any price gains there.
Everyone’s now watching to see what happens next.
