Article / 12 July 2016 at 11:10 GMT

Shanghai Composite hits three-month high

Saxo Capital Markets China
  • Shanghai Composite hits three-month high
  • Airline shares, coal stocks outperform
  • Was Beijing behind some of the buying?

On the Bund in Shanghai
Chinese equity bulls drove the benchmark SHCOMP to a three-month high today. Photo: iStock 

By Jay Luo

China shares surged on Tuesday with a late-afternoon rally. The benchmark Shanghai Composite index rose 1.82% to a three-month high at 3049.38 while the Growth Enterprise Market index increased 1.3% to 2247.35. Airlines shares led the market and coal stocks also outperformed.

Shanghai Composite Index hits three-month high:
Shanghai Composite Index, Daily

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Source: EastMoney

The SSE 50 index, which consists of the 50 biggest companies on the Shanghai stock exchange, rose 2.07% on Tuesday. It’s reported that China’s pension funds, which owns about 2 trillion yuan for investment, will start to buy equities in the second half of 2016. 

This is good news for high-dividend the blue-chip stocks which are the traditional favourites of pension funds.

At the same time, it’s widely expected that China's central bank will cut its banking deposit reserve ratio in the second half and even interest rate if the Federal Reserve takes a dovish stance. 

These expectation have led to a revaluation of some stocks, especially the big caps with low P/E ratios.

Coal and steel shares rose strongly as Chinese president Xi once again emphasised supply-side and state-owned enterprises reform. China coking coal futures rose near 7% on Tuesday, and steel futures rose 5.62%, extending its gains since May 25 to 32%.

Coking coal futures up 7% amid expectations of supply cut:
Source: EastMoney 

Over the past two months, defence and aerospace shares rose nearly 25% due to a tense geopolitical situation and the expectation of state-owned enterprise reform. Coal and non-ferrous metals surged by more than 20% as commodity prices continue to rise. 

Food and beverage, household appliances, and other blue-chip stocks rose more than 10%.

However, some suspect it was the so-called "national team" who were buying up stocks before the release of a series of micro data prints including monetary supply and trade balance on Wednesday, and Q2 GDP and June retail sales on Friday.

— Edited by Michael McKenna

Jay Luo is an editor and analyst at Saxo Capital Markets in China
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