(Bloomberg) -- Chinese stock bulls have been burnt many times before but the current wave of euphoria is so strong that they’re throwing caution to the wind.
The CSI 300 Index has just capped its best week since November 2008, thanks to a barrage of monetary stimulus and vows from the Politburo to boost fiscal spending. Goldman Sachs Group Inc. says “this time is different,” lending support to an emerging view that the rally may prove more sustainable. Morgan Stanley sees another 10% upside.
Yet how long this confidence will last hinges a lot on the scale and speed of follow-up policy action. Any weakness in spending during the Golden Week holiday may also shift focus back to China’s consumer malaise and an entrenched property crisis that has pushed the country to the cusp of a deflationary spiral.
“The recent announcements from the Politburo echo the sentiment of Mario Draghi’s ‘whatever it takes’ speech a decade ago, underscoring a strong resolve to support the economy,” said Manish Bhargava, chief executive officer at Straits Investment Management in Singapore, referring to the former European Central Bank president’s pledge to preserve the common currency during the 2012 debt crisis. “This China rally is very strong.”
Measures released this week include interest rate cuts, freeing-up of cash for banks, billions of dollars of liquidity support for the stock market, and a vow to end the decline in property prices.
The sweeping package has pushed the CSI 300 Index up by 15.7% this week, putting the benchmark for mainland shares firmly in positive territory for the year. The Hang Seng China Enterprises Index rose for an 11th straight session, a run of gains that was last seen in 2018.
Eight of 12 investors in a Bloomberg survey this week said this will be a turning point for a long-term rally, while four saw it as a short-term rebound. The optimists picked tech shares as a top bet, compared to the market’s earlier preference for more defensive stocks.
It’s a remarkable shift from earlier this month, when stocks tumbled to more than a five-year low amid a deepening property slump, weak consumption and geopolitical headwinds. Economists are now more hopeful that China can reach the growth target of about 5% expansion for the year, and see chances of a larger fiscal stimulus to accompany interest-rate cuts.
Long-Term Fundamentals
“The Politburo communication and market’s positive response to it suggest that the authorities have seized the initiative against China bears through rather forceful forward guidance on fiscal policy and real estate sector rescue,” said Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd. Investors betting on more fiscal measures will be buying even if they remain anxious about long-term fundamentals, he added.
But for those who’ve experienced multiple false dawns, there are plenty of reasons to be cautious.
The current rally is akin to that seen when China abandoned its Covid Zero policy in late 2022. Back then, the CSI 300 rose to the brink of a bull market before collapsing again. Shares rallied more than 15% from February to May this year as Beijing tightened the screws on short selling and quant trades and state funds actively intervened, before resuming their slide as earnings failed to recover.
More fundamentally, investors remain wary of increasing exposure materially after China’s yearslong crackdown on the private sector and tensions with the West altered their perception of the country’s investability.
“The key risk is a continuation of policies which discourage large entrepreneurs from investing and growing their companies,” said Mark Mobius, chairman of Mobius Emerging Opportunities Fund. “It is important for there to be encouragement of innovation and private investment.”
But for those hungry to recoup years of losses, this is the moment to chase gains.
“For a trader now is not the time to ask whether it is structural or technical,” said Hao Hong, chief economist for Grow Investment Group. “This is a very easily tradable rebound and will lead to not only China but a global risk-on rally.”
--With assistance from Winnie Hsu, Charlotte Yang, Sangmi Cha, April Ma, Mengchen Lu, Cynthia Li and Helen Yuan.
©2024 Bloomberg L.P.
