Investors have not been this bullish on Chinese stocks for years

Shanghai

CONFIDENCE is surging through China's stock market, with traders boosting leverage and pumping in funds in ways not seen in years.

Investors have driven margin debt past the key one trillion yuan (S$197 billion) level to the highest since February 2018. Privately offered funds have boosted their stock positions to the highest since early-2015, and foreign buying has continued this month after December's record inflows. Analysts are the most bullish on large caps since late-2014, according to data compiled by Bloomberg.

Such signals follow a year in which a big early rally was halted by trade war escalations. With sentiment now reinforced by a "Phase One" trade deal and signs the economy is stabilising, there is optimism that stocks will continue their ascent after the week-long Lunar New Year break which begins on Friday.

Healthy inflows have helped the Shanghai Composite Index gain nearly 8 per cent since a November low, making it one of the best performers among global benchmarks in that time.

"Things are all looking positive and we are quite upbeat on A-shares," said Raymond Chen, a portfolio manager with Keywise Capital Management (HK) Ltd. His fund has been at the maximum level allowed for stocks since November. "We'd advise sticking to your stock positions before the break and adding a bit more if there's a short-term pullback."

Chinese investors lifting their leverage is seen as a bullish signal, and the 1.04 trillion yuan level is only at the metric's five-year average. It's less than half the level hit at the height of the 2015 bubble, indicating there is space for leverage to grow.

With liquidity support from the People's Bank of China and government stimulus, a brighter earnings outlook is being anticipated for China-listed firms.

Net income for CSI 300 Index companies other than banks may have grown 21 per cent in 2019, helped by tax breaks, according to Alexious Lee, head of China strategy research at Jefferies Hong Kong Ltd. Meanwhile, China International Capital Corp last week raised its estimate for listed firms' 2020 profit growth to 10 per cent from 6 per cent, saying it expects a stabilising economy to help drive revenue growth.

To be sure, some large companies have recently provided guidance for last year that fell short of analysts' estimates, namely liquor producer Kweichow Moutai Co and China's largest carmaker, SAIC Motor Corp.

Domestic private fund managers boosted their stock allocations in December to an average of 81.5 per cent, according to CR Trust data tracking more than 100 privately offered funds. That's the highest level since March 2015, just before the local market boomed.

Overseas investors are pretty keen on China stocks, too. They have increased their buying via the Shanghai and Shenzhen links lately, even after snapping up a record 73 billion yuan worth in December. Daily, foreigners have purchased an average 4.5 billion yuan worth in January, which would be the highest-ever figure for a month if maintained.

That came after the value of Chinese equities owned by overseas entities surged 82 per cent last year to 2.1 trillion yuan.

"We don't see any big downside risks in January-February," said Chen Li, chief economist for Soochow Securities Co.

"The macro economy is in sound condition, Sino-American trade negotiations seem settled for now and retail and foreign investors continue to pile in. We think the market will remain active." BLOOMBERG