Why China shares have surged despite dire data

Investors look at computer screens showing stock information at a brokerage house in Shanghai.
Aly Song | Reuters

China shares shook off weak economic data, surging nearly 5 percent Monday after a report that the mainland will finally begin to overhaul its stumbling state-owned enterprises (SOE).

"There are people expecting some kind of acceleration of mergers and acquisitions on the SOE stocks," Steve Wang, the chief China economist at Reorient Financial, said.

China's State Council approved an ambitious plan to overhaul the country's bloated state-owned enterprises, pushing them to become profitable, the South China Morning Post reported Saturday, citing sources close to the matter. The report described the plan as "Singapore-inspired," creating two companies similar to Singapore's state-owned wealth fund Temasek in an effort to separate the government from day-to-day business decisions.

Read More CRSC, first major Hong Kong IPO since rout, stalls on debut

Three Chinese state-controlled shipping companies -- China Cosco, China Shipping Development and China Shipping Container Lines -- had their shares suspended Monday, spurring renewed speculation of a potential merger.

Others noted that SOE reform plays were rallying, but it wasn't clear how sustainable the gains would be, with many still nervous after the Shanghai Composite plunged around 30 percent from its mid-June peak.

"Talking to a lot of clients now, cash positions are pretty high," Tham Mun Hon, a China strategist at UOB KayHian, said. "In the near term, the market has stabilized. SOE reforms will come soon," he said, but he added that "investors are just taking short term positions. I would not look too much into short-term price movements. Overall, the market outlook remains pretty unexciting given overall profit outlook for the second half isn't very encouraging."

Other factors may also have helped to boost China shares. For one, traders may see bad data as a good sign. Data released Saturday showed China's exports dropped a bigger-than-expected 8.3 percent in July and imports declined 8.1 percent from a year earlier.

Read More Goldman estimates China's 'national team' stock rescue at $144bn

"Expectations of further easing are building and announcements of liberalization have boosted the equity market," Kit Juckes, a strategist at Societe Generale, said in a note Monday.

Reorient's Wang also noted another factor boosting China shares: the China Securities Finance Corp. has been buying shares to support the stock market, with as much as $483 billion on hand.

"There's speculation that [they] will put the stock index at around 4,000 so they won't stop until that happens," Wang said. The ended at 3928.82, up 4.9 percent.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter