Can China stage another rebound?
The raft of stimulus can provide a short-term boost, but will likely do little to resolve China’s deeper structural issues
IN AUGUST this year, we adopted a more constructive stance on Chinese equities, recognising that valuations were extremely low and that the property market was showing signs of bottoming out.
Market sentiment was so bearish that by early September, China’s onshore shares, measured by the CSI 300 Index, were trading at multi-year lows.
China stocks up substantially since September
Our decision to shift from a negative to neutral stance on China turned out to be fruitful, as Beijing unleashed a sweeping stimulus package on Sep 24, which sparked a market rebound.
The long-awaited stimulus included measures such as the easing of rules for homebuyers, cutting the seven-day reverse repurchase rate and existing mortgage rate, freeing up cash for banks, and providing liquidity support for the stock market.
China announced more fiscal stimuli on Oct 12, but did not provide specifics on the package’s size. Investors hoping for a bazooka-style fiscal boost to sustain the rally were left disappointed after the briefing on the property market by the housing ministry on Oct 17. More policy-support measures were unveiled the following day, following the release of third-quarter growth data.
As of Oct 18, with the rally fizzling out, the CSI 300 Index was still up 17 per cent since the stimulus announcement of Sep 24.
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At its peak, onshore Chinese shares gained as much as 27 per cent. Similarly, the Hang Seng China Enterprises Index (HSCEI), which tracks mainland securities listed in Hong Kong and the MSCI China Index, both rose by over 20 per cent from Sep 24 to their respective peaks.
Making sense of the stimulus
Recent developments reinforced our view that Chinese policymakers are committed to stabilising the property market; there have been three meetings on the housing market in four weeks.
Key highlights from the most recent housing ministry briefing included the expansion of the “white list” programme, which grants unfinished housing projects and developers access to credit, and the urban-village renovation initiative that is expected to drive some demand for homes.
These measures complement earlier steps, such as clearance given to local governments to use special bond funds to purchase unsold homes. Resolving the deep-rooted property crisis will take time.
Meanwhile, the 20-basis-point (bps) reduction of the seven-day reverse repurchase rate came as no surprise to us. With the Federal Reserve’s 50 bps rate cut in September, the narrowing interest rate differential between the US and China gives the People’s Bank of China, the country’s central bank, greater flexibility to adjust its monetary policy to address the challenges in its economy. This follows the 10 bps reduction in July.
China’s reduction in the seven-day reverse repo rate in September might appear promising on the surface because of its larger size, but the real impact on the economy is likely to be minimal. A key reason is that real interest rates, which account for inflation, remain too high.
China’s annual inflation rate stood at only 0.4 per cent in September, while producer prices declined by 2.8 per cent year on year. With deflationary pressures that could offset the decline in the average loan rate, real borrowing costs are still elevated. The latest rate cut thus feels more symbolic than transformative.
What would be more effective now are downward adjustments to the loan prime rate (LPR), which we hope will come in the following months. On Sep 20, China maintained its one-year LPR at 3.35 per cent, and the five-year one at 3.85 per cent.
The one-year LPR influences corporate and most household loans, and the five-year LPR serves as a benchmark for mortgage rates. Lowering LPRs can enhance liquidity in the market, making borrowing more affordable for businesses and consumers, thereby providing more effective economic support.
Such easing measures could lead to another temporary revival of the stock market in the future.
Even so, while stimulus can provide a short-term boost, it does little to resolve China’s deeper structural issues. The current measures fall short of addressing key challenges, such as the shift towards a more state-controlled economy.
Additionally, tensions with Western economies persist, as the European Union decided to impose tariffs as high as 45 per cent on electric vehicles from China, posing risks to long-term growth. Going by history, China has the tendency to retaliate.
China’s third-quarter gross domestic product grew by 4.6 per cent, slowing from 4.7 per cent in the previous quarter. Without consistent and concrete plans to solve existing challenges, we expect the Chinese economy to settle into a more stable, but slower, growth path in the years ahead.
China as a tactical position
Since share prices have only partially recovered from their bottoms, valuations of Chinese stocks remain low by their own historical standards.
For instance, the 12-month forward price-to-earnings ratio of MSCI China stands at more than 10 per cent below the 10-year historical average. Shares are also trading at a striking 40 per cent discount to their 2021 peak, before the regulatory crackdown. Valuations are even lower when compared to the broader global market.
What does this mean for investors who missed the rally in September? Recent developments show that, despite China’s long-term structural challenges, policy-driven shifts can create windows of opportunities for investors to exploit valuation gaps. With the possibility of additional stimulus in the near term, which could boost the economy, it is perhaps still not too late to invest in China.
Rather than having China as a core component of portfolios, adopting a tactical position will be crucial because of the associated risks. The Chinese market remains volatile, leading to the need for careful monitoring. A tactical strategy usually refers to a short-term bet, representing a relatively small portion of a portfolio rather than an all-in approach.
For investors uncertain of which individual stocks to buy, China exchange-traded funds and unit trusts offer a diversified way to capitalise on broader market movements.
The writer is an assistant manager with the research and portfolio management team at FSMOne.com, the B2C division of iFast Financial, a subsidiary of iFast Corporation
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