Muted markets raise questions about China's economic recovery

[SHANGHAI] Investors were relieved this week when China's first-quarter economic data defied expectations for a further cooling in growth. Yet the subdued reaction in stock markets, especially in China, has called into question the durability of any recovery.

For Chinese equities, which have rallied hard this year, the good news was also likely in the price already. Many traders were looking past the data showing the world's second-biggest economy grew at a faster-than-expected 6.4 per cent pace.

While industrial production also grew at its quickest pace since 2014 in the first quarter, the shaky outlook for earnings underlined the broad pressure on China's economy, including from the still-unresolved Sino-US tariff war as well as slackening global trade and growth.

China's blue-chip CSI300 index closed flat on Wednesday, and lost 0.4 per cent on Thursday.

"The market has already priced in economic improvement. The market is always ahead," said Wu Kan, head of equity trading at Shanghai-based Shanshan Finance.

After a battering in 2018, China's stock indexes have been on a bull run. The blue-chip CSI300 index has risen more than a third this year, making it the world's best-performing major index as policy support helped to whet investors' appetite for equities.

Signs of gradual progress in trade negotiations with the United States have also burnished investors' optimism.

It's not just China's broad indexes that have benefitted from the enthusiasm. Underscoring rising risk appetite, star fund manager Fu Pengbo from Foresight Fund Management Co last month had to cut short the marketing period on a 5.87 billion yuan (S$1.19 billion) equity fund after it was 12 times oversubscribed.

The fund, which started raising money on March 21, attracted subscriptions exceeding 70 billion yuan, forcing Foresight to stop accepting fresh orders at the end of the first day of sales.

International markets have also benefitted from signs of stabilisation in China - and unlike China's indexes, some foreign benchmarks initially pushed higher after Beijing released first-quarter economic data. Weakness in US healthcare shares, concerns over economic performance in Europe and doubts about the sustainability of China's tentative recovery subsequently ate away at global gains.

The rapid rise in Chinese share prices this year has also raised questions about how much further the rally has to go, highlighting the market's dependence on policy support.

Mizuho Bank analysts said that "excessive market exuberance", particularly in the property sector, could push Beijing to shift to a stance of "neutral tightness" in the second half the year, which could impact equity prices.

The less rosy near-term prospects for corporate earnings may also weigh on valuations.

Hubert de Barochez, an analyst at Capital Economics, said in a client note that he expects Chinese equity prices to drop in the coming months, as corporate earnings tend to be more in line with export data than the domestic economy.

Exports showed a rebound in March following a sharp drop late last year, but weak global growth is seen as limiting a continued strong recovery.

A rise in estimated earnings per share in China this year suggests that investors are optimistic about trade and the likelihood of a US-China deal, Mr de Barochez said. But he argued that a deal would be "unlikely to drive a turnaround in trade in our view, given the gloomy outlook for the global economy".

POLICY AMMUNITION

While uncertainty remains over whether China's economy has truly turned around, with analysts expecting economic growth to slow to a near 30-year low of 6.2 per cent this year, further policy support to foster a more sure-footed recovery may be a boon for markets.

Beijing has already begun adding fiscal stimulus policies to its toolkit this year, hoping that billions of dollars in additional tax cuts and infrastructure spending will help to stabilise the economy alongside more bank lending.

"Unlike some developed markets, the Chinese policymakers still have bullets, they could use monetary policy and fiscal policy" to support growth, said George Sun, head of global markets, Greater China at BNP Paribas.

China's economy appears to be "in a relatively benign environment, certainly much better than people expected six months ago," Mr Sun said, noting that gains in Chinese indexes have not been accompanied by worrying rises in implicit leverage, as in the speculative-driven stock bubble of 2015.

"Stocks have risen a lot this year, said Louis So, co-chief investment officer at Value Partners Group.

"But there's no need to worry, because it's just recouping last year's losses, and we think there's still room to rise."

So said it would typically take three to six months for government stimulus to feed into the economy, adding that Chinese stocks will also benefit from relatively loose US monetary policy.

"We feel US interest rates will remain at a relatively low level over the next one or two years," he said.

REUTERS