Xi Jinping’s pledge to revive growth is finally winning over some investors who’ve been burned time and again by China’s economic woes.
(Bloomberg) — Xi Jinping’s pledge to revive growth is finally winning over some investors who’ve been burned time and again by China’s economic woes.
Even as skeptics pointed to a dearth of specifics in the latest promises from the ruling Politburo, traders cast off weeks of pessimism to drive gains across stocks, corporate debt and the yuan.
They’re betting a more forceful pro-growth tone from the top will be enough to fuel a tradeable rally — and may auger more success in tackling China’s wide array of challenges from mountains of local government debt to a slumping housing market.
“Clearly, markets have been disappointed as they anticipated more rapid improvements, but they are now beginning to rationalize their growth expectations,” said Andrew McCaffery, global chief investment officer at Fidelity International. “Our view is that this somewhat unexciting period will eventually give way to a more positive market tone.”
The big question is whether the follow-through from authorities will sustain the rebound. Brief bursts of optimism as China emerged from strict Covid restrictions have repeatedly turned into losses, making Chinese markets among the region’s worst performers amid a stream of grim economic data.
Read: China Vows Pit Hopefuls Against Skeptics on Market Recovery
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 pointed to the shift where driving domestic demand was seen as more important than an export-oriented industrial policy.
For the bulls, the stronger recognition of the challenges is enough.
The Hang Seng China Enterprises Index, which tracks major Chinese companies listed in Hong Kong, gained 5.3%, the most since November when China was relaxing Covid restrictions. The onshore yuan rallied as much as 0.7%, with traders reporting that state-owned banks were also seen supporting the currency.
On the mainland, the benchmark CSI 300 Index climbed 2.9%, also the most since November. Overseas investors purchased a net 19 billion yuan ($2.7 billion) of onshore stocks via the trading links with Hong Kong, the biggest daily inflow since December 2021. Turnover in Shanghai and Shenzhen was also highest in three weeks.
The rally is widespread, with gains from retailers to technology companies. A Bloomberg index of property stocks rose more than 10%, with Country Garden Holdings Co. jumping 18% 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. It omitted President Xi’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.
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 Bhd. 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 as Beijing has repeatedly fallen short of expectations. After all, Chinese stocks have been on a downtrend since the Hang Seng China gauge surged 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 sold into intermittent rallies since, showing a lack of conviction in a market that’s headed for another year of losses. The benchmark CSI 300 is almost flat this year, while Hong Kong’s Hang Seng Index is down 1.8%, making it one of the worst performers in Asia.
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 from banks 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 icy relations with the U.S. Citigroup Inc. strategists wrote in a July 24 note that investor positioning has turned increasingly negative for Chinese shares onshore and is the most bearish across the indexes they track.
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 Ltd. “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.”
Read: China’s Tech Crackdown Is Ending. What Does It Mean?: QuickTake
–With assistance from Wenjin Lv, Ishika Mookerjee, April Ma, John Cheng and Chester Yung.
(Updates with Tuesday’s closing prices)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.