Market Views: Will China equities get a real boost from supercharged stimulus?
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Investors in China haven't seen their stock holdings post consecutive gains in a while, until this week.
Since Sept 24, Chinese equities have posted their best weekly rally in both onshore A-share and offshore H-share markets in almost a decade, driven by the central government's largest stimulus package announced since the pandemic.
The CSI 300 jumped by 10.7% this week, while the offshore Hang Seng Index has rallied 9.1% to a 14-month high, with the daily trading volume exceeding HK$300 billion ($38.6 billion) on Sept 26.
The gains were driven by the People's Bank of China (PBOC), China Securities Regulatory Commission (CSRC), and National Financial Regulatory Administration (NFRA) announcing a slew of easing measures, including a 20-basis-point cut to the benchmark seven-day reverse repo rate to 1.5%, and a 50-basis-point cut to the required reserve ratio (RRR) for major banks to 9.5%.
On the property market, existing mortgage rates will be cut, while the downpayment ratio were slashed.
Further, on Sept 26, an unscheduled Politburo meeting led by President Xi Jinping vowed to stabilise the property market, intensify countercyclical fiscal and monetary policies, and use central and local government bonds to better implement the leading role of government investment.
For the first time, Xi said that it is necessary to "stop property prices from falling".
Despite all these positive surprises, institutional investors remain mindful of the fundamental challenges facing the world's second-largest economy.
We asked fund houses whether the stimulus is sufficient to support a more sustained economic recovery and stock rally, and what it would take for long-term capital to return.
The following responses have been edited for clarity and brevity.
Ken Wong, Asian equity portfolio specialist &
Jocelyn Wu, portfolio manager, Greater China equities
Eastspring Investments
The measures announced this week sent strong signals that the central government is well determined to support the economy.
In the past quarter, the market has grown increasingly frustrated, as the Chinese economy continued to lose momentum, and no effective measures have been introduced.
This week’s meeting reversed such expectation, thus leading to a strong rally in both A and H share markets. It is the first time the central government has encouraged financial institutions to use leveraged funds to enter the A-share market. Onshore investors were quite excited about this new move.
However, more fiscal spending, or a larger fiscal deficit has to be in place before we could envisage any growth recovery or fundamental improvement. Before that happens, we may still see weaker economic data that could weigh on market sentiment.
While our team believes that the recent rally reflects improved investor risk appetite and better policy outlook, further market upside will need to come from 1) greater fiscal easing; 2) more clarity on the set-up of the funding support to non-financial/listed companies; and 3) better economic data.
Growth-oriented stocks are likely to benefit more from the improvement in investor sentiment, with attractive opportunities in e-commerce stocks which have been trading at low valuations due to the lack of foreign investor interest.
With the overhang of interest rate cuts on existing mortgages now removed, select Chinese banks may also look attractive. Meanwhile, beaten-down consumer stocks may also benefit from follow-on policies that could lift consumption.
Marc Franklin, senior portfolio manager, asset allocation, Asia
Manulife Investment Management
We expect a meaningful short-term bounce in Hong Kong and China stock markets owing to the very cautious investor positioning which creates the potential for a sharp short covering-led bounce.
In the long term, however, concerns remain over structural headwinds for both mainland China’s economy and local markets.
Amongst the headwinds, the ongoing reset in the residential real estate sector, as well as subdued household consumer and corporate investment sentiment, will inhibit any rebound in both financial markets and economic activity from sustaining beyond the near term.
More broadly, we now have both the US and China easing monetary policy which should create some rotational forces within financial markets in the near term. Longer-duration bonds could underperform other asset classes momentarily, and investors will feel more emboldened to diversify their equity exposures into select emerging markets, such as in Southeast Asia.
Lorraine Tan, director of equity research, Asia
Morningstar
The move by the PBOC to lower reserve requirement ratios, cut interest rates, provide liquidity to the market and fully back up the funding for a real estate inventory purchase fund is positive from the standpoint that it marks a more aggressive set of policy support for the China economy.
However, we still only anticipate a mild positive impact. So, we view the reaction by investors to be more of a relief that the government appears more willing to intensify efforts and this should help reduce the risk of a deeper slowdown rather than one where GDP growth expectations go back to 5+%.
There is an expectation that we may see bigger fiscal policy support. Note that China has not cut tax rates and continues to prefer to have a targeted approach. I think the central government remains concerned about local government debt levels and so any moves that may see this deteriorate would still be taken as a last resort.
The fiscal deficit target is 3%. I’d like to see a cut to the value-added tax that is imposed on company revenue. Regardless, it doesn’t change our view that we continue to like selective Chinese stocks on valuation grounds (think a lot of bad news is reflected) – particularly those with minimal exposure to exports given slowing global growth and geopolitical risks.
Zhu Chaoping, global market strategist
JP Morgan Asset Management
The latest announcement marks a shift towards a more aggressive easing stance. We believe these steps are in the right direction. Also, the decision of announcing multiple stimulus measures in one go, rather than spacing them out, should provide a stronger signal to the market.
The PBOC Governor mentioned that the central bank is ready to transact central government bonds in the secondary market. This may foster stronger policy coordination between the central bank and the Ministry of Finance to boost market liquidity in the next stage.
Among these measures, new liquidity tools in the stock market may effectively improve market liquidity and sentiment.
Hence, liquidity injection and rate cuts are necessary to boost lending, but confidence is key. The announcement on Sept 24 is an important step to reaching this goal. More systemic economic policies, including fiscal measures, may help further restore confidence among consumers and businesses.
The immediate market reaction has been more positive for the offshore market than the onshore market. It is worth noting that the H-share market has been trading at a significant discount relative to the onshore A-share market for some time.
Alongside the potential boost from the Fed’s rate cuts, international investors may prefer offshore market over the onshore market in the near term.
We believe these coordinated policy announcements could pave the way for further policy support and raise the possibility of an economic upcycle in 2025.
Combined with private sector companies that have improved their profit margin and corporate fundamentals, we do see value opportunities in Chinese equities, and diversification opportunities given the expensive markets around the world.
Cheuk Wan Fan, chief investment officer, Asia, global private banking and wealth
HSBC
The comprehensive stimulus package announced on Sept 24 reflected Beijing’s stronger sense of urgency and more proactive easing stance to defuse deflation risks and restore market confidence. The scale and pace of policy easing have exceeded conservative market expectations.
The unexpected lowering of the downpayment ratio for second home purchases to 15% in alignment with first home mortgage may signal a notable policy shift away from the longstanding stance of “housing is for living only”. The enhanced Rmb300 billion relending facility for affordable housing should help accelerate the destocking of unsold inventory.
We stay neutral on mainland China and Hong Kong equities and see tactical opportunities from undervalued quality industry leaders with strong earnings and high potential to enhance shareholder returns by increasing dividends payout and share buybacks.
The Hang Seng Index and MSCI China Index are trading at 9.4x and 9.5x 12-month forward earnings, respectively, representing steep valuation discounts to the MSCI World’s 20x forward P/E and S&P 500’s 21.7x forward P/E.
We expect broader-than-expected policy stimulus could support a near-term tactical rally of mainland China and Hong Kong stocks like the market rebound in April-May 2024. However, the sustainability of the tactical rally will depend on the improvement in activity data and earnings momentum following the policy announcement.
We like quality Chinese state-owned enterprises paying high dividends, blue chip internet leaders with solid earnings and big valuation discounts to their global peers.
In Hong Kong, we favour undervalued high dividend stocks in the insurance, telecom, and utilities sectors and select oversold property developers with strong balance sheets.
John Woods, CIO, Asia
Homin Lee, senior macro strategist
Lombard Odier
We await the outcome of the US elections to reassess our fundamentally cautious outlook and investment positioning on China.
We currently hold no tactical investments in Chinese assets and keep portfolio allocations at strategic levels. Within emerging market equities, we keep China allocations in line with MSCI indices and focus on listing market and sector selection.
Far more will be needed to change our cautious assessment of China’s medium- to long-term economic trajectory. The most immediate challenge is to stabilise the real estate market, which continues to struggle under falling prices and a glut of unsold or unfinished homes.
While the latest policy announcements could induce more state-owned enterprises to absorb some excess housing inventory, households’ demand for housing loans remains extremely weak due to accelerating falls in house prices and lingering doubts about developers.
For more risk-tolerant investors keen to increase exposure to Chinese assets in the interim, several areas may be considered on a tactical investment horizon. Consumer discretionary and communication services stocks listed on the Hong Kong market, as well as selected luxury and mining stocks may be worth considering.
Even if China’s medium-term outlook remains mixed, additional stimulus measures, or a positive turnaround in real estate demand could push these stocks higher. In the same vein, investors could also consider non-Chinese assets with significant exposure to the Chinese economy.