Home Market Spotlight China’s Pledge to Support Its Market Is a First Step. Here’s What’s Needed for a Durable Recovery.

China’s Pledge to Support Its Market Is a First Step. Here’s What’s Needed for a Durable Recovery.

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China's Pledge to Support Its Market Is a First Step. Here's What's Needed for a Durable Recovery.


China tried to get back into the good graces of investors this week with vague but rare reassurances of more market-friendly policies and efforts to boost the economy. It acknowledged that its crackdown on internet stocks and the property market may have gone too far, and vowed to reduce the cost of Covid restrictions.

The wide-ranging promises struck the right chord to repair investor sentiment, but a durable recovery for the painful rout in Chinese stocks and economic slump will require Beijing to follow through with actions that match its words.

On Wednesday, the readout from a special meeting of policy makers led by China’s top economic official Liu He included vows for more market-friendly policies and proactive measures to support the economy. Government officials also left the impression that the crackdown on the internet sector was winding down and that implementation would be clearer—addressing one of investors’ bigger fears.

In a nod to the panic that ensued last week as the Securities and Exchange Commission began identifying Chinese companies at risk of delisting, policy makers said they supported overseas listings and cryptically said Chinese regulators were making progress on a cooperation plan with the US to avoid delisting .

On Thursday, Beijing turned its attention to concerns China’s strict Covid restrictions would exact a painful toll on its economy as Omicron cases rose. Authorities said they would look to contain the outbreak with the smallest cost.

The spate of reassurances acted as a salve for already-cheap stocks that had taken a further dive last week on delisting concerns, the People’s Bank of China declining to cut interest rates as some had expected, and the worry that China could face devastating sanctions itself if it’s unable to stay neutral in Russia’s war in Ukraine.

Though the


iShares MSCI China

(MCHI) exchange-traded fund and the


KraneShares CSI China Internet

ETF (KWEB) — logged double-digit gains on Wednesday, they pulled back again on Thursday and are sitting on losses of 35% and 61%, respectively, for the past year.

While Beijing may have pulled sentiment out of the abyss and improved the set-up for stocks, investors need to pick their spots and be clear-eyed about China’s challenges in managing its economic slowdown and its delicate balance in supporting its friend Russia without getting dragged deeper into a geopolitical imbroglio.

“This looks more like a temporary response to current weakness,” says Capital Economics Senior China Economist Julian Evans-Pritchard via email. “It would be naïve to assume the policy and regulatory headwinds facing the tech and property sector have now gone away.”

After last year’s turbulence, policy makers have prioritized stability for months ahead of the 20th Party Congress when President Xi Jinping is expected to take a third term—a reason Barron’s in January said Chinese stocks could be primed for a turnaround.

But it’s not smooth-sailing ahead: ”The remarks were important in setting the tone: That it’s not back to Maoism, but it doesn’t change the major issues driving Chinese equities,” says Michael Kelly, global head of multi-asset strategies at PineBridge Investments, which oversees almost $149 billion and adds that it’s also not clear where policy will head after Xi has been anointed for life.

For now, there’s little change in Beijing’s core priorities, several of which could contribute to an erosion in margins. That includes its efforts to tackle inequality in part by pushing companies to support social good, and creating a corporate level playing field, Kelly says. Also a concern: China’s slowing economy. Joyce Chang, chair of global research for

JPMorgan
,

says the first thing investors will turn to is economic data to see if it supports a recovery or has been jeopardized by Omicron.

Feel-good sentiment can’t be dismissed in the near-term. Louis Lau, co-manager of the Brandes Emerging Markets Value fund, says policy follow-up needs to take the form of interest rate cuts and more muscular support for the property market. He is adding to Chinese equities, especially Macau gaming and travel stocks that should benefit from any relaxation in China’s Covid policies and an eventual re-opening.

GQG Partners Chairman Rajiv Jain favors cyclicals like

China Merchants Bank

(3968: Hong Kong), which stand to benefit from increased government spending and loan growth as the economy recovers.

Internet giants at the center of the past year’s rout are primed to benefit from a bounce, with value managers like Ginny Chong, head of Chinese equities at Mondrian Investment Partners, drawn to dominant companies trading at steep discounts, like

Alibaba Group Holding

(BABA), which has lost half its market value,

Tencent Holdings

(700.Hong Kong),

Baidu

(BIDU) and

Autohome

(ATHM), which at its lows traded for less than its cash.

Some of these companies face challenges that could limit upside, including regulation that hampers promising areas like fintech, and the continued scrutiny of data security. Instead of fetching previous multiples of 20 times earnings, valuations may end up closer to low- to mid-teens , some managers say. At 9 times forward earnings for Alibaba, that still represents upside—though it could come with volatility.

Yet if US and Chinese regulators reach a compromise to avoid mass delistings, internet stocks would be among the biggest beneficiaries. But so far the SEC hasn’t reciprocated China’s more conciliatory tone, and money managers say they still favor Hong Kong-listed versions of these shares given China’s push to reduce its reliance on the US The SEC didn’t immediately respond to a request for comment.

Even bigger political risks loom. Congress is debating a bill that would scrutinize outbound investments, potentially hurting the longer-term investment outlook for China, and the sanctioning threat looms. President Joe Biden and Xi are expected to speak on Friday. If China confirms it will not offer Russia a lifeline, that could help thaw US-China relations, offering yet another boost to stocks in the near-term.

“Equities have triggered a policy put but will remain highly volatile; this is still a stock pickers market,” says Rory Green, TS Lombard’s chief China economist.

As one money manager eyeing Chinese stocks stressed: China’s not for the faint of heart but starting to search among the recent wreckage could be fruitful.

Corrections & Amplifications

Joyce Chang is chair of global research for JPMorgan. An earlier version of this article incorrectly identified her as the firm’s global head of research.

Write to Reshma Kapadia at [email protected]

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