[Reuters Breakingviews] China stocks rally is a worrying flight to safety

HONG KONG, March 18 (Reuters Breakingviews) - Chinese retail investors appear to be regaining some of their long-lost risk appetite in local stocks. That should be a welcome sign that efforts to restore confidence in the economy are finally having an impact. On closer look, however, the recent equities boom should worry Beijing.

The problem is punters' lack of appetite for Chinese stocks writ large, as the benchmark CSI 300 index .CSI300 of top Shanghai- and Shenzhen-listed stocks is up less than 2% year to date. A minor rally from official vows to boost consumption, which pushed the gauge into positive territory for the year last week, has since fizzled after details were released.

Instead, money is flowing into Hong Kong’s stock market, where the Hang Seng Index .HSI has risen more than a fifth this year - the best performance among major indices globally. That's driven mostly by mainland traders: net purchases this year have totaled HK$386 billion ($49.7 billion), per figures from Hong Kong's Stock Connect trading scheme, already an increase of 190% on the first full quarter of 2024.

Much of those flows have been into large tech listings like Alibaba 9988.HK and Tencent 0700.HK after AI start-up DeepSeek releasedits low-cost large language model, fuelling hopes that China is catching up with the West. The hype looks justified, especially now that Beijing has thrown its weight behind the trend. But Western tech giants have yet to revolutionize their own businesses, or bottom lines, through AI, suggesting any benefits to their Chinese rivals will also take time to manifest — and retail investors are not the patient type. That is one strike against the rally’s staying power.

The second is that the Hong Kong rally appears to be partly driven by a desire to minimize exposure to the mainland's currency risk. U.S. President Donald Trump has already raised tariffs on Chinese exports by 20 percentage points this year and more levies are expected for many of America’s top trading partners on April 2, once a review of reciprocal tariffs is complete.

Beijing has kept the yuan steady at around 7.2 per dollar so far this year but Trump's standing threat to raise levies on Chinese goods to 60% has stoked expectations of inevitable devaluation to cushion the blow to the country’s export-reliant economy. Against this backdrop, Hong Kong’s stock rally looks more like a bet against China's economy than a vote of confidence.

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CONTEXT NEWS

China’s benchmark CSI 300 index of large Shanghai- and Shenzhen-listed stocks has risen just 1.6% this year against a searing 22% rally for Hong Kong’s Hang Seng Index.

Net purchases of dollar-pegged Hong Kong stocks by mainland traders year to date total HK$386 billion, an increase of 190% on the first quarter of 2024, according to figures from Hong Kong's Stock Connect programme.

Mainland China stocks badly lag Hong Kong's gains