(Bloomberg) -- China’s nervy stock market got a boost Monday after a handful of firms said earnings are improving, while data also showed the economy may be stabilizing.
The Shanghai Composite Index added 0.8% as of the mid-day break, rebounding from its worst week in two months. The ChiNext Index of smaller companies rallied 2.3%. Official data released Monday on factory output and retail sales growth beat estimates for June, while investment in the first half of the year accelerated. That’s even as China’s economy grew at the slowest pace since quarterly data began in 1992.
Investors are now looking to the reporting season for clues on how corporate China is holding up. While some fell short of expectations, with Han’s Laser Technology Industry Group Co. and Dong-E-E-Jiao Co. down by the daily limit, others including Beijing Lanxum Technology Co. and Guangzhou Shangpin Home Collection Co. surged after saying they were profitable in the first six half of 2019.
“Some ChiNext firms’ positive first-half earnings are helping stocks especially those with low valuations,” said Zhu Junchun, an analyst with Lianxun Securities Co. “The market may have priced in earnings expectations that are too high for some blue chips to deliver. It’s relatively easier for growth firms to record stronger-than-expected earnings.”
The rebound comes just as the imminent start of a new trading venue in Shanghai raised questions around whether the market was ready to absorb $5.4 billion in fresh supply. Throw in an economic slowdown, excessive large-cap valuations and selling from overseas funds, and Chinese shares were among the world’s worst performers since Presidents Xi Jinping and Donald Trump agreed to resume trade talks.
Some 577 companies, including the tech board debutantes, have applied to list on the mainland this year, already twice last year’s total, according to data compiled by Bloomberg. The number of applicants jumped by nearly seven times year-on-year in June. A surge in new options tends to drag cash away from other stocks, and the 25 tech board companies are set to raise about 20% more than initially planned.
Foreign investors sold a combined 4 billion yuan ($580 million) of Chinese equities via the trading links with Shanghai and Shenzhen last week, the most since May. JPMorgan (NYSE:JPM) Asset Management is among those selling emerging-market assets due to worries about the trade war.
Consumer staples have been the best performers in China over the past two weeks on bets domestic consumption will hold up. The rally has made some of the more popular stocks expensive on a price-to-earnings basis, a sign that the market may be peaking unless profit growth accelerates. Liquor makers Wuliangye Yibin Co. and Kweichow Moutai Co. are near the highest multiples in more than a year. Those two stocks slipped on Monday.
The surprise government takeover of Baoshang Bank Co. in May has had a ripple effect on lending conditions, making it more expensive for corporates to borrow. Investors are concerned that small- and mid-cap companies will see lower earnings because they have to pay more for funding, said Yan Kaiwen, analyst at China Fortune Securities.
(Updates with Monday trading throughout.)
