China’s rally over the past week has been nothing short of spectacular. It has only been five days since the country’s central bank announced its latest package of stimulus measures. In that time, the CSI 300 index has risen by 25.0 percent, surpassing the S&P500’s gains of 21.0 percent which took nine months to chalk up.
Fig 1: CSI 300 index (30 Sep 2022 – 30 Sep 2024)
Source: Bloomberg/ UOBAM
We asked Colin Ng, UOBAM’s Head of Asia Equities, to explain this sudden reversal of sentiment, and whether it can last.
China has unveiled many policy measures in the past. What is it about this latest package that is causing markets to rally so strongly?
The most significant difference from previous policy announcements is that this is a comprehensive bundle instead of piecemeal measures.
Firstly, the magnitude of the rumoured fiscal stimulus (between RMB 2 – 3 trillion) is more aggressive than the market had expected.
In addition, the measures focus more on demand than supply, which, in our view, represents a policy pivot. The government has signalled that there is potential for the stimulus package to be further upsized if it is deemed in time to be insufficient. This highlights China’s intention and commitment to turn the economy around at all costs.
Finally, the timing of the announcement, in the wake of the Fed’s recent rate cut, suggests that the Chinese authorities are now less concerned about the potential of these easing measures to spark RMB volatility.
Do you think the current rally is sustainable?
While the above measures are significant, the current rally has been intensified by China’s out-of-favour status over the past two years. Prior to the rally, the market had been attractively valued and under-owned by portfolio managers, who had to scramble to re-build their positions following the announcement.
Looking ahead, we see a number of catalysts that could sustain the rally. These include the following:
- This week is the 75th founding anniversary of the People’s Republic of China (PRC), and President Xi Jinping’s speeches should continue to lift the investor sentiment
- The potential approval of an additional budget to allow for an increased quota of bond issuances, which would reaffirm the commitment to supporting financial markets
- A Politburo meeting scheduled for October will be closely watched for signs of willingness to further enhance economic growth
- Any indications of de-escalation in US-China trade tensions in the lead-up to the US elections could provide another significant boost for the Chinese market
Looking ahead, which sectors and industries do you expect to benefit the most?
It appears that many sectors are already benefiting from the current rally. So far, high-beta growth stocks with strong fundamentals - especially large-cap internet stocks - have seen the strongest gains.
However, in the longer term, we note that brokerage companies will stand to benefit from higher trading volumes. Meanwhile, travel, consumer, and logistic stocks should all enjoy a boost from increased policy-induced spending.
We would also expect stronger government support for innovation, which would be positive for AI-related high-tech firms. We prefer H-shares over A-shares, given strong foreign inflows and the US rate cut cycle. On the other hand, major banks could lag due to concerns over their national service burden.
What about China’s property sector? When can we expect this sector to start turning around?
We believe China’s property sector have the potential to stabilise soon.
Both the central and local governments are putting forward measures to clear housing inventory and stimulate demand. After last week’s announcement from the central government, tier 1 cities such as Shanghai, Guangzhou, and Shenzhen have already stepped up their local housing easing measures. This includes reducing downpayment ratios and easing restrictions on home purchases.
However, we will need to wait for more data releases before determining the actual inflection point.
What are the risks ahead for the China market??
In the short term, we would not be surprised by some profit-taking following the strong rally. However, this should not persist unless we also expect delays in the policy roll-out or signs of weak implementation. These developments could cause markets to lose faith quickly.
Additionally, China’s week-long National Day Holiday starts today. We are keen to analyse the consumption data during and after this event for signs that the recent stimulus is having an effect on consumer sentiment.
Finally, any further instability in China’s property market or economic data could undermine current tailwinds, especially as expectations are now higher than they were.
If you are interested in investment opportunities related to the theme covered in this article, here is a UOB Asset Management fund to consider: United Greater China Fund
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