China's World-Beating Stock Rally Is Starting to Feel Different

(Bloomberg) -- China's booming equity rally entered a new phase this week as economic data provided bulls with a fresh catalyst.

After signals from the Treasury market in March got the whole world panicking over global growth, equity investors were encouraged by data showing China's factory sentiment stabilized. They took it as evidence that the economic slowdown may not be as bad as feared, which in China sent the Shanghai Composite Index to a fresh high for the year. Hong Kong stocks also got a lift, entering a bull market and matching their best streak in a year. The Hang Seng Index briefly rose above 30,000 points on Thursday.

It's a change of focus for a market that was driven by momentum and risk appetite in the first quarter. Another leg up will be based on whether data and earnings improve. Equity markets in mainland China, Hong Kong and Taiwan are shut Friday for a holiday.

Tough start

It was a bad week for China's government bonds just as they were added to a key global benchmark. (Incidentally, a loss also greeted index-tracking investors buying A shares for the first time last year). A brighter outlook for China's economy has seen traders pare their expectations for more monetary easing, while a rallying equity market is pulling money away from safer assets. It was only last month that the market was rife with expectation that we'd get another reserve-ratio cut, or even lower interest rates.

The yield on 10-year sovereign notes has surged 19 basis points since last Friday, poised for its largest weekly increase since December 2014. Foreign investors, already concerned with thin liquidity and a lack of hedging tools onshore, now have another reason to snub the securities.

Chart of the week

Hong Kong stocks finally recovered all their losses from 2018 this week. Last year was the Hang Seng's worst in seven years.

Catching up

Here's what else caught our eye this week:

• China may feature its first ever 1,000-yuan stock.
• IPOs will be a gamble for the first time in years.
• A Chinese commodities trader is restructuring.
• This Australian store sells everything to China.
• Bankruptcies in a wealthy province spooks creditors.
• Tencent sold this year's biggest dollar offering in Asia.
• How officials plan to lure tech stars to its exchanges.
• China's pension fund trims its stake in a state bank.

--With assistance from Tian Chen.

To contact the reporter on this story: Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Philip Glamann, Magdalene Fung

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