(Yicai Global) June 27 -- The marked bounce back of the Chinese mainland stock markets and foreign capital inflows in June is due to the government’s enhanced monetary policy support over the past two months, which remains moderately loose to support growth as opposed to the tightening that is happening in other major economies, Swiss investment giant UBS said.

As of June 24, the Shanghai Composite Index reached 3,350 points, a big improvement on May’s low of 2,800 points, while the Shenzhen Component Index surged 20 percent from the beginning of the month to 12,690 points. Net inflows from the Hong Kong stock exchange into the Shanghai and Shenzhen bourses hit CNY62.7 billion (USD9.4 billion).

Our asset management clients firmly believe in the effectiveness of China’s policy support, Thomas Fang, head of China global markets at UBS, told Yicai Global. The country’s monetary policy is in an easing cycle, and although the economic indicators can still be improved, a turning point will appear soon.

China’s economic growth will bottom out in the second quarter and start to rebound in the second half, UBS said. There was a broad improvement in the economy in May, as reflected in that month’s key economic indicators, as the supply end restrictions due to the Covid-19 outbreaks in April were relaxed.

The mainland bourses’ expected drop in profitability is likely to be over by the end of the third quarter, after which the market could have a conspicuous jump in valuation, Zurich-based UBS said.

And any market corrections over the next two months will provide attractive investment opportunities. "There are no lack of large Singaporean funds buying on the dip, which suggests institutional investors are expecting the economy to bounce back and borders to remain open," he said.

Offshore indexes composed of Chinese firms performed even better. As of June 13, the MSCI China Index increased 15 percent from a month earlier.

Global investors are expecting the platform economy to enter a more stable phase as the crackdown eases and policies shift to normal regulation, UBS noted. This has released an important positive signal, which is behind the mainland markets’ big rebound.

Concerns that US-listed Chinese stocks might have to delist due to greater scrutiny by US authorities have been allayed somewhat. But greater volatility on the global markets cannot be ruled out, and there is a possibility that this might spillover to the Chinese market, UBS said.

"The US’ Federal Reserve’s unexpected 75 basis point rate hike in June resulted in huge sell-offs of risky assets, including US stocks and cryptocurrencies," Fang said. "High inflation levels may last for a while, at least until year end, and this will lead to further rate hikes and more tampering by central banks, with the greater possibility of an economic recession," he added.

Editors: Xu Wei, Kim Taylor