A booming rally in China’s markets on a Beijing pledge to support growth ran almost immediately into questions of whether the gains will prove sustainable.
Even as skeptics questioned the new promises from the Politburo, traders cast off weeks of pessimism to drive gains across stocks, corporate debt and the yuan. For them, it’s a show of faith or an opportunistic trade in China’s ability to tackle a wide array of challenges from mountains of local government debt to a slumping housing market.
Others from Societe Generale to Pinpoint Asset Management can’t shake off the feeling of deja vu, as Beijing has repeatedly fallen short of expectations. The rebound in Chinese markets as the nation emerged from strict Covid restrictions has long turned into losses that made them among the worst performers in the region following a stream of increasingly grim data.
“We are standing at a crossroads with many asking what type of policy are we waiting for,” said Andrew McCaffery, global chief investment officer at Fidelity International. “Clearly, markets have been disappointed as they anticipated more rapid improvement, but they are now beginning to rationalize their growth expectations. Our view is that this somewhat unexciting period will eventually give way to a more positive market tone.”
With the Monday statement from the ruling Communist Party’s 24-member Politburo short on specifics, strategists are weighing the nuances. Some like Macquarie’s economists argued the tone is the key in China’s top-down system. Others point to the shift where driving domestic demand was seen as more important than an export-oriented industrial policy.
The Hang Seng China Enterprises Index, which tracks major Chinese companies listed in Hong Kong, gained as much as 5.1%, the most since March. The onshore yuan rallied as much as 0.6%, with traders reporting that state-owned banks were also seen supporting the currency.
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On the mainland, the benchmark CSI 300 Index climbed 2.9%, the most since November. Overseas investors purchased a net 18.8 billion yuan (US$2.6 billion) of onshore stocks via the trading links in the morning session, putting the shares on track for the biggest daily inflow since December 2021. Turnover in Shanghai and Shenzhen is also on track to top the 1 trillion yuan mark.
The rally is widespread, with gains from retailers to technology companies. A Bloomberg index of property stocks rose 10%, with Country Garden Holdings jumping 20% in Hong Kong. The dollar bonds of developers also rallied as Beijing pledged an “adjustment” of restrictions for a sector plagued by liquidity shortfalls and slumping demand.
The Politburo’s language on property — which accounts for up to 20% of GDP once related sectors are added — was also softer than in previous meetings. It omitted President Xi Jinping’s signature slogan that “houses are for living, not for speculation” for the first time in a mid-year review of the economy since 2019.
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The promises of support for the property market and private sector, and a potential resolution for local government debt risks suggest Beijing knows what is needed, said Fiona Lim, senior FX strategist at Malayan Banking in Singapore. “These acknowledgments were important and possibly sufficient for markets to breathe a sigh of relief, even though we probably need to wait a while for concrete measures to come through.”
Yet, there are plenty of skeptics. After all, Chinese stocks have been on a downtrend since a reopening surge that saw the Hang Seng China gauge surge about 50% over three months before fizzling at the end of January.
“We have seen this movie before,” said Chun Wang, a portfolio manager at Minneapolis-based Leuthold Group. “The latest policy signal from the Politburo is not surprising, considering the credit/liquidity crunch Chinese property companies are currently facing.”
Investors have been selling into intermittent rallies since, showing a lack of conviction in a market that’s headed for another year of losses. The benchmark CSI is almost flat this year, while Hong Kong’s Hang Seng Index is down 2%, making it one of the worst performers in Asia.
Even bulls like Goldman Sachs Group Inc., UBS Group AG and Morgan Stanley have lowered their expectations for Chinese stocks on growth worries. Goldman’s banking analysts have gone a step further, saying investors should sell the nation’s biggest lender and prepare for lower dividend payouts due to their exposure to souring local government debt.
Behind the periodic outbursts of pessimism were a slew of data that pointed to an anemic economic recovery, as well as Beijing’s reluctance to roll out large scale fiscal stimulus and still icy relations with the US.
Official figures released last week showed China’s economy lost momentum in the second quarter, with consumer spending growth weakening notably in June and property investment contracting. Meantime, home sales tumbled last month, snapping a four-month rebound.
Even Tuesday’s new-found euphoria may have partly been due to short covering, according to some observers. “It was good to get the waiting out of the way,” said Redmond Wong, a strategist at Saxo Capital Markets HK. “Now we got the Politburo and it was not that bad, a bit lukewarm but enough to draw some investors back to the market and have traders closing shorts.”
