What happened
The Hang Seng Index in Hong Kong had an amazing start to the week as the benchmark stock index climbed by nearly 1,000 points (or 3.8%) to finish the day at 26,339 points.
This was driven by a phenomenal surge in mainland China stock markets as the Shanghai Composite Index finished Monday trading up a whopping 5.7%.
Some of the biggest winners on the Hang Seng Index for the day were financials, particularly insurance companies. State-backed insurance firm, and Hang Seng Index constituent stock, China Life Insurance Company Limited (SEHK: 2623) was the index’s biggest winner as it saw a double-digit percentage gain, finishing Monday up 14.4%.
Other notable index winners included acoustic components manufacturer AAC Technologies Holdings Inc (SEHK: 2018), which gained 9.8%, and mainland Chinese property developer Country Garden Holdings Ltd (SEHK: 2007), which saw its shares climb 7.5%.
Meanwhile, state-backed semiconductor firm Semiconductor Manufacturing International Corporation (SEHK: 981), also known as SMIC, saw its shares skyrocket just over 20% – extending an incredible run that has seen its share price more than double in less than a month.
So what
The global glut of liquidity that has been unleashed by central banks since the start of the Covid-19 pandemic has been identified as the main culprit in soaring stock markets worldwide.
Some market commentators believe this is starting to make its way to Asia, where stock markets have underperformed the gains seen in the US.
According to Bloomberg, Chinese state media have also been talking up the domestic stock markets in China (also known as A shares). A recent headline in China’s Securities Times commented that nurturing a “healthy” bull market after Covid-19 was more important than ever to the economy.
There have also been positive data coming out of the Chinese economy. The country’s June services sector PMI saw a jump to 58.4 in June, up from 55.0 in May – with any reading over 50 indicating an expansion.
The Hang Seng Index is now officially in a “bull market” having rallied over 20% from its recent low (on 23 March 2020) of 21,696.
Now what
With the majority of listed companies in Hong Kong being mainland Chinese, the direction of the Hong Kong market could be reliant on how well the Chinese economy fares.
There’s also the question of supportive monetary and fiscal policy in China, which should benefit many of the companies listed in Hong Kong.
Long-term investors, though, should watch how quickly prices run up. Talk of the Chinese government encouraging the stock market has the hallmarks of the 2015 Chinese stock market bubble.
That episode ended in tears for investors as the bubble spectacularly popped after surging stock market gains over a five-month period.