Major Chinese stock indices closed higher after a volatile session on June 29, with the Shanghai Composite Index rising more than 1%. Trading volume across the two markets shrank slightly from the previous Friday to approximately 3.54 trillion yuan.
While the year-on-year profit growth for industrial enterprises in May saw a slight dip compared to April, the overall trend remained positive, exceeding the growth rate of the first quarter. Revenue growth continued its upward trajectory. The energy and AI-related industrial chains were primary drivers of this performance. However, some midstream and downstream enterprises faced pressure from energy supply constraints, leading to weaker capacity utilization and widening profit disparities across sectors. Downstream manufacturing linked to domestic demand remained subdued, indicating that insufficient demand continues to be a key challenge for the ongoing domestic economic recovery.
Overseas, the US PMI for June continued to climb, signaling robust growth. Coupled with the Federal Reserve's hawkish dot plot, this reinforced market expectations for a rate hike this year, further strengthening the US dollar. In this macroeconomic environment, the domestic equity market is likely to experience continued volatility in the near term. As the market digests concerns over high valuations in the tech sector, close attention should be paid to the latest developments in the AI industrial chain and shifts in the macro fundamentals. A balanced portfolio allocation strategy may be prudent.
Key Developments
The People's Bank of China formally introduced an overnight reverse repo operation as part of its open market operations on June 29. The central bank conducted 157.5 billion yuan in 7-day reverse repos at a fixed rate of 1.40%, alongside a 300 billion yuan overnight reverse repo operation. The interest rate for the overnight operation was not disclosed concurrently.
This move follows prior indications from PBOC Governor Pan Gongsheng at the Lujiazui Forum about plans to enrich the open market operation toolkit by adding an overnight instrument to better meet the banking system's short-term liquidity needs. The official launch of the overnight reverse repo tool represents a significant expansion of the central bank's liquidity management toolkit, reflecting a "targeted and fine-tuned" approach to monetary policy. For the A-share market, the introduction of this tool is expected to help smooth liquidity fluctuations at the quarter-end, stabilize market interest rate expectations, and provide an appropriate liquidity environment for equity valuations.
Data released by the National Bureau of Statistics on June 27 showed that from January to May, profits earned by industrial enterprises with annual revenue of over 20 million yuan totaled 3,143.96 billion yuan, a year-on-year increase of 18.8% (on a comparable basis). In May alone, profits grew by 21.1% year-on-year. Total operating revenue for these enterprises from January to May rose 5.5% year-on-year, with the profit margin on operating revenue reaching 5.56%, an improvement of 0.63 percentage points from the same period last year.
Profits for industrial enterprises continue to recover, but the structure shows significant divergence. Sectors such as non-ferrous metals, electronics, and chemicals, benefiting from rising prices and expanding AI computing demand, saw profits more than double, highlighting the strong momentum in new quality productive forces. Conversely, traditional industries like automobiles, steel, and building materials experienced significant profit declines, reflecting an uneven domestic demand recovery. The notable gap between profit growth and revenue growth indicates that improved profit margins were the main driver of earnings growth, suggesting the trend of enhanced corporate profitability is likely to persist.
According to a June 28 report by US media outlet Axios, citing multiple senior US officials, the US and Iran have agreed to cease attacks on each other. Both sides plan to meet in Doha, Qatar, on June 30 to address disputes concerning the Strait of Hormuz. This follows renewed military exchanges between the two sides on June 26 and 27, with each accusing the other of violating an agreement reached earlier in the month.
The swift agreement to halt hostilities after a brief military clash indicates that, despite friction, both sides retain a willingness to negotiate. The Doha meeting brings the Strait of Hormuz dispute back to the negotiating table, which could help ease tensions in the energy market. The temporary de-escalation of geopolitical risks aids in stabilizing global risk appetite. However, it is important to note that negotiations on fundamental disagreements, such as the nuclear issue, remain uncertain, and tail risks from geopolitical tensions are not fully eliminated.
Market Performance
On June 29, the three major A-share indices closed in positive territory. At the close, the Shanghai Composite Index stood at 4,073.90 points, up 1.16%. The Shenzhen Component Index was at 15,812.87 points, gaining 0.19%. The ChiNext Index rose 0.54% to 4,216.70 points, while the STAR 100 Index advanced 3.09% to 2,260.28 points. Among Shenwan's primary industry sectors, pharmaceuticals & biotechnology, agriculture, forestry, animal husbandry & fishery, and beauty & personal care led the gains, rising 5.91%, 2.96%, and 2.86%, respectively. Sectors such as diversified industries, building materials, and communications were among the top decliners, falling 3.97%, 3.48%, and 2.71%, respectively. In terms of market breadth, 2,469 stocks advanced while 2,934 declined.
Capital Flows
The total market turnover was 3,539.579 billion yuan, down from the previous trading session. The balance of margin trading and securities lending stood at 3,011.961 billion yuan as of the close on the preceding Friday, also showing a decrease from the previous day.
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