China stocks most overbought as rally reverses

Hong Kong - Chinese stocks retreated from a three-month high, with materials and consumer-discretionary companies leading the drop, amid signs that recent gains by the market were excessive.

The Shanghai Composite Index halted a three-day advance as it declined 0.4% after trade data signaled sluggish consumer demand in the world’s second-largest economy. Jiangxi Copper paced metal shares lower after rising to this year’s highest level. The benchmark gauge’s 14-day relative-strength index surpassed 70 on Wednesday for the first time since just before last summer’s $5trn rout.

Official data released Wednesday showed a bigger-than-expected decline in imports, which suggests that domestic demand is still weak, according to Australia & New Zealand Banking. China is set to report second-quarter gross domestic product data on Friday, with economists predicting an expansion of 6.6%, which would be the slowest since 2009.

“As it edges up, the market is running into greater and greater resistance,” said Shen Zhengyang, a strategist at Northeast Securities in Shanghai. “China is unlikely to further boost money supply even if global central banks start a new round of easing, while the Chinese economy is not improving in the near term.”

The Shanghai Composite, which traded at 3 047.91 as of 08:08, has risen 5.4% since June 23, when the UK voted to exit the European Union, placing the gauge among the top 5 gainers among 94 global benchmarks tracked by Bloomberg. The Hang Seng China Enterprises Index fell 0.1% in Hong Kong, while the Hang Seng Index was little changed.

Jiangxi Copper fell 2.8% and China Molybdenum slipped 2.7% on the mainland. China Southern Airlines dropped 3.4% and Air China was down 1.1%.

A lack of capital inflows is spurring investors to move between the A-share market’s sectors, said Shen of Northeast Securities. "Money is rotating out of energy and material stocks, which have had decent rallies, into new-economy growth companies," he said.