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4 Chinese Stocks Rally on Stimulus Hopes

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China’s stock markets finished in the green for the first time in five days on Tuesday, as indications of an economic slowdown sparked stimulus hopes. A significant decline in exports was the culprit this time around, underlining the declining demand for China’s goods.

Stocks in the U.S. also gained on stimulus hopes. The first such measures, directed primarily at the markets, were announced late on Monday. Gains continued into Tuesday boosted by announcements as well as expectations of broad based stimulus measures.

Export Slump Continues

In the first seven months of 2015, the country’s exports fell 0.8% year over year, while imports shrank 14.6%, indicating weak demand in international and domestic markets. In July alone, exports were down 8.3% year over year in dollar terms, while imports fell 8.1%.

Declines were marginally lower in August, but the overall trend continued to reflect economic weakness. Exports dropped 5.5% year over year in dollar terms. Meanwhile, imports declined 13.8% in dollar terms.

August shipments were affected by the explosion in the port facility in Tianjin. The closure of factories due to the parade held to mark the 70th anniversary of China’s WWII victory is also responsible for the slump in exports. A decline in expenses on oil imports possibly explains the lower import bill.

Market-Specific Measures

Late Monday, authorities said that shareholders holding stocks for more than a year would not have to pay personal income tax on dividends. This is another measure targeting at reducing market volatility caused by speculation.

The logic is that such a move would encourage investors to hold equities for a longer period. Additionally, investors holding shares for a month to a year would have to pay on half the dividend tax. These measures were implemented starting Tuesday.

Only a few hours earlier, China’s major exchanges revealed plans to introduce another measure aimed at curbing volatility. Better known as a “circuit breaker”, the measure would involve suspension of trading for half an hour if the CSI 300 increases or a decline by 5% from the last day’s close before 2:30 pm.

Incase such a movement occurs after 2:30 pm, trading will remain suspended for the day. Additionally, a 7% gain or loss would result in trading being closed for the day immediately.

Markets Rise

Expectations that further economic stimulus would be introduced by China to boost its flagging economy helped U.S. stocks post gains on Tuesday. The Shanghai Composite Index had gained 2.9% on Tuesday with the lion’s share of gains being notched up during the final hour of the trading day. This is characteristic of recent market behavior where the government steps in to put equity markets in order as soon as volatility rises.

The benchmark index gained for a second successive day on Wednesday, increasing 2.3%. For every stock that declined, 30 stocks gained. Small-cap stocks led gains following speculation that further stimulus measures would be introduced by the government to support the economy.

Economic Measures Unveiled

Late on Tuesday, several announcements were made by the Ministry of Finance. The government will increase the pace of important construction projects and rationalize debt management at the local government level and undertake tax reforms.

Additionally, two railway projects, which together amount to around $70 billion received approval. This is in keeping with the views of market watchers and experts that the country’s infrastructure needs a major impetus in order to restart the country’s growth cycle.

Meanwhile, an official document revealed that reforms of government owned companies would be fast tracked. If successfully implemented, the plan would lead to the most significant reforms of state owned enterprises in more than 25 years. Shares of some of these companies would be sold while others would undergo consolidation. 

Stocks That Gained

China Southern Airlines Co. Ltd. (ZNH - Free Report) gained 13.2% on Tuesday, ending at $31.09. China Southern Airlines carries a Zacks Rank #3 (Hold).

China Eastern Airlines Corp. Ltd. (CEA - Free Report) moved up 9.8% to close at $25.58. China Eastern Airlines sports a Zacks Rank #1 (Strong Buy).

Yanzhou Coal Mining Co. Ltd. increased 9.1% to end at $4.70. Yanzhou Coal Mining carries a Zacks Rank #3.

Youku Tudou Inc. gained 8.8% to close the day at $17.03. Youku Tudou has a Zacks Rank #3.

Lasting Impact?

Stocks have gained whenever new stimulus measures have been unveiled by China’s government. However recently, such gains have proved to be unsustainable. These steps are also yet to have any lasting impact on the economy. It remains to be seen whether these new steps manage to boost China’s flagging economy and troubled markets in the long run.

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