China Stocks Show Mixed Signals as Key Fed Rate Decision Approaches

China stocks experienced slight gains as investors focused on the upcoming Fed rate decision. The Shanghai Composite Index rose by 0.5%, while the CSI 300 Index added 0.4% to 3,171.01. After notching its lowest level in over five years, the recovery signals cautious optimism among traders. Meanwhile, Hong Kong's Hang Seng Index increased by 1.7% upon reopening after the holiday.

Caution prevailed ahead of Thursday’s decision by the Federal Reserve, with investors digesting disappointing August economic data from China. Both retail sales and industrial output fell short of expectations, with ongoing declines in home prices. Analysts suggest that a potential Fed rate cut could support China’s stocks by narrowing the interest-rate spread, thus providing more room for policy easing by the People’s Bank of China.

Currently, the likelihood of a 50-basis-point cut stands at 65%, while a quarter-point reduction has a 35% probability according to CME Group data. Wu Xinkun from Haitong Securities indicated that a Fed rate cut would boost sentiment towards Chinese stocks in the short term, though long-term outlook remains tied to the fundamentals of China’s economy.

Among industries in the CSI 300, energy and material sectors showed gains, while consumer staples struggled with weak consumer spending. Major changes were observed in stocks such as Shaanxi Coal Industry, which rose by 4.4%, and Kweichow Moutai, which sank by 2.9%.

Additionally, geopolitical tensions and the upcoming US presidential election are expected to further impact market performance, with candidates taking hardline stances towards China.

Other key Asian markets also had mixed results, with Japan's Nikkei 225 up by 0.5% and South Korea's Kospi rising 0.1%, in contrast to the S&P/ASX 200 in Australia, which remained relatively unchanged.