China's blue-chip index hovered near 18-month highs on Monday, as institutional investors stepped up their buying into industry leading big caps, but small-cap shares continued to languish as their earnings disappointed. The mood was also aided by views that China may maintain high levels of fiscal spending to avoid the risk of a sharp economic slowdown in the second half.
The blue-chip CSI300 index ended up 0.4 percent, to 3,743.47 points, while the Shanghai Composite Index also added 0.4 percent to 3,250.60 points, closing at its highest in 3 months. China published draft rules late on Friday to promote the development of public-private partnerships (PPP) in infrastructure investments, while the Shanghai Stock Exchange announced it would support the securitisation of PPP projects.
Robust government infrastructure spending was a key contributor to stronger-than-expected economic growth in the first two quarters, though analysts have predicted some loss of momentum in the second half of the year as the impact of earlier stimulus measures begins to fade. The International Monetary Fund said on Monday it now expected stronger growth of 6.7 percent in China in 2017, up 0.1 percentage point from its April forecast. Financial and consumer shares led the gains, after second-quarter reports by mutual funds showed institutional investors continued to accumulate blue chips with stable earnings.
Industry heavyweights including Ping An Insurance Group of China, Gree Electric Appliances, China Pacific Group Insurance and China Merchants Bank were among fund managers' favourites in the second quarter. But Shenzhen's start-up board ChiNext remained sluggish following last week's nearly 5 percent slump.
Gao Ting, head of China strategy at UBS Securities, expected ChiNext firms' second-quarter earnings growth to range from a drop of 23 percent to growth of 5 percent, based on their preliminary announcements, representing a sharp slowdown from average growth of 26.2 percent in the first quarter. "The ChiNext seems unlikely to reverse course, in our view," Gao wrote, citing numerous headwinds including the rapid pace at which new listings are approved that increases equity supply, as well as tighter market liquidity and low investor risk appetite.
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