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China stocks are now beating US ones during the virus outbreak. Here's why

Swift containment measures, fiscal stimulus optimism and reasonable valuations have set China on the rebound

Policy-easing measures have ensured ample liquidity in China's markets, with interbank borrowing costs tumbling to their lowest in almost a decade.

Hong Kong

WHILE US investors are grappling with violent price swings as the novel coronavirus spreads, their Chinese counterparts at the heart of the outbreak are back to making decent money again.

China's swift and strict measures to contain the virus, optimism over fiscal and monetary stimulus and relatively reasonable valuations are among the key reasons for the recent relative rebound, said market participants.

Perhaps more importantly, China investors have already gone through the panic stage that their US counterparts are experiencing now, they said.

Chinese stocks in Shanghai and Shenzhen just posted their best week in a year - a 5 per cent gain - after touching a two-year high on Thursday.

Meanwhile, the S&P 500 Index has fallen almost 11 per cent from its peak from last month, with volatility surging.

"It is interesting that China has started to outperform world equities since the start of February, as confidence grows that it has passed the worst in terms of the virus, while concerns grow that the number of cases will surge elsewhere," said Jefferies Financial Group strategist Christopher Wood.

He recommended increasing China share weightings this week.

"This market action also raises the hope, at least, that investors will look past the likely horrible first-quarter Chinese data," he added.

Here is a look at some of the drivers of the US-China divergence.

Virus containment

With a string of drastic measures including putting entire cities under lockdown and controlling people's movements, new infections have dropped significantly in China, yet are only beginning to climb in the US.

As of Thursday, the number of novel coronavirus cases in the Seattle area jumped by 20; 11 more New York state residents were confirmed to have been infected.

"China has been able to contain cases, while the situation in the US is still unknown," said Alex Wong, director of asset management at Ample Capital Ltd.

"If they carry out the same procedures as in China, it will be a huge disaster to the economy, so people are trying to stay away from US stocks," he added.

Investor sentiment

To Mr Wong, US stock investors are still in the early stages of reacting to the virus outbreak.

They have just passed the period of across-the-board panic selling, and may soon focus on picking up stocks that are less impacted by the epidemic, as was the case in China and Hong Kong, he said in a telephone interview.

He has been buying shares in US medical-equipment companies and video-game developers.

"We are in a different situation," he said. "People here have already been betting on stocks related to the 'life-returns-to-normal' theme, but they remain uncertain about that in the US, and that's why we are seeing this divergence."

Stimulus measures

To Andy Wong, a Hong Kong-based fund manager at LW Asset Management, China's quick stimulus measures have fuelled the outperformance of the nation's equities; the Federal Reserve's emergency rate cut, however, only reminded US investors how much they had underestimated the scale of the problem.

A succession of policy-easing measures has ensured ample liquidity in China's markets, with a measure of interbank borrowing costs tumbling to its lowest in almost a decade.

Investors have also bet on infrastructure shares in the hope of further fiscal stimulus.

Cheap valuation

Valuation may also be part of the reason. The CSI 300 Index's fell to a one-year low of 10.6 times profits projected for the next year in February, after the initial reaction to the novel coronavirus hit China's markets.

Meanwhile, US equity valuations dipped to about 16.6 times estimated earnings, going by data compiled by Bloomberg.

Still, some remain sceptical about the outperformance of Chinese equities.

Hao Hong, chief strategist at Bocom International, sees China's A shares eventually catching up on the downside to their US peers.

"Logically speaking, how is it possible that the centre of the epidemic got hurt less than somewhere else?" he said.

"The effectiveness of these stimulus measures is very limited at this moment," he added.

"How could these infrastructure projects start when workers still haven't returned to work?" BLOOMBERG