SHANGHAI, Dec 31 (Reuters) - China's stock market has clawed its way from the bottom of the major global index rankings toward the top this year, with a more than 35% jump in the main blue chip index set to trump the roaring rally in its Wall Street counterparts.
Investors have largely shrugged off the economic damage wreaked by the Sino-U.S. trade war, and are chasing consumer and technology stocks, encouraged by Beijing's stimulus and bold capital market reforms.
By lunch break on Tuesday, the last session of 2019, China's bluechip CSI300 Index traded near an eight-month high at 4,082.56 points, up 35.6% from the start of the year. The Shanghai Composite Index is up 21.8% for the year, trading at 3,038.26 points.
In contrast, the S&P 500 has gained 28.5% and Dow Jones Industrial Average is up 22.01%.
"At the end of 2018, investors were dumping stocks amid fears of an unprecedented trade war. Today, investors are more composed, knowing all the cards Washington has, and more confident of the Chinese government's counter-measures," said Wu Kan, head of equity trading at Shanghai-based Shanshan Finance.
But Wu cautioned there are already signs of overheating in some sectors, such as consumer and tech, predicting volatility in 2020.
U.S. President Donald Trump formally launched a tariff war with China in 2018, leaving its stocks down 25% that year, the worst performance among major markets. But China's CSI300 rebounded 28.6% in the first quarter of 2019, as investors pounced onto battered shares while Washington and Beijing moved toward a cease fire.
That rally stalled in early May after trade talks hit a wall, with Chinese stocks fluctuating in a relatively narrow range as trade negotiations went on-and-off. The market resumed its upward trend this month, up more than 6%, as both sides agreed on an interim deal to de-escalate trade tensions.
Although China's economy has ground to its weakest pace in three-decades this year, hit by the trade war, investors were encouraged by Beijing's stimulus measures, bold market reforms, and heavy foreign inflows.
"The sharp correction in 2018 pushed valuations of China stocks to record lows, prompting a recovery in 2019, as Beijing rolled out supportive measures to boost the economy," said Zhou Longgang, analyst with Huachuang Securities.
Among the measures, China suspended a deleveraging campaign that spooked investors in 2018, and started easing monetary policy moderately. Beijing also stepped up fiscal spending on infrastructure investment.
The stock market also benefited from a slew of measures to reform China's stock market, including the launch of the Nasdaq-style STAR Market in Shanghai, and the inclusion of China A-shares into global benchmarks by index publishers such as MSCI and FTSE Russell.
By the end of September, foreigners held a record 1.77 trillion yuan ($253.14 billion) in Chinese equities, up nearly 40% in a year, according to the latest data from the People's Bank of China.
But performance has diverged sharply.
Tech shares surged over 60% as Beijing vowed to boost technology self-reliance, while an index tracking consumer staple stocks jumped about 80% on government stimulus measures.
In contrast, cyclical sectors including resources and energy far underperformed the broader market.
Also lagging the wider China rally was Hong Kong's stock benchmark Hang Seng, which rose 9.1% in 2019, partly battered by the city's anti-Beijing protests. The index dropped 0.5% to 28,189.75 points on Tuesday in a half-day trading session. (Reporting by Samuel Shen, Liu Luoyan and Andrew Galbraith; Editing by Sam Holmes)