(Bloomberg) -- A historic rally in Chinese stocks took a breather on Thursday, as traders took profit following gains of more than 30% from a September low.
The Hang Seng China Enterprises Index fell as much as 4.9% before finishing the day down 1.6%, snapping a 13-session run of gains. Chinese developers led the declines after a measure tracking the sector surged by a record Wednesday. Mainland Chinese markets remain closed through Oct. 7 for the Golden Week holidays.
Optimism has been running high that the current rally is different from previous short-lived rebounds, with a growing number of global money managers turning bullish on the once-shunned market. Yet the frenzied trading over the past week has also raised concerns of a bubble as equity benchmarks reached overbought levels.
After the recent gains, it’s “normal to see some profit taking ahead of the weekend, and also ahead of China stock market re-opening next week,” said Wong Kok Hoong, head of institutional equities sales trading at Maybank Securities Pte.
With mainland markets closed since Tuesday, traders have plowed into Hong Kong to ride the momentum. Turnover hit HK$434 billion ($55.9 billion) on Wednesday, just shy of a record reached earlier in the week. Brokers said they are on stand by around the clock to respond to a surge in client inquiries.
The relative strength index for the Hang Seng China gauge soared to a record high of 91 on Wednesday, above the 70 threshold that some traders view as a sign that gains have gone too far.
Investors may brush off Thursday’s equity slide as a blip as signs that Chinese consumer sentiment has improved over the holiday add to confidence that the gains can extend.
The retreat will nonetheless prompt a reality check among traders who have been chasing the rally, partly driven by “FOMO.” Key to the extension of gains will be whether Beijing follows up with detailed fiscal policy announcements after the holidays.
In a sign of rising expectations for Beijing to expand public spending, a leading Chinese economist said the country has room to ramp up fiscal support for the economy by issuing as much as 10 trillion yuan ($1.4 trillion) in special debt.
“The phenomenal surge in Hang Seng Index led it to reach levels very close to that at the end of 2021, when China’s property problem began to appear,” said Tomo Kinoshita, global market strategist at Invesco Asset Management. “So it’s natural for stock prices to make a pause around this level, until we get the news of what Chinese authorities actually implements in terms of fiscal stimulus policy.”
(Updates with closing levels and other details)
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