Foreign investors unconvinced China’s stimulus will do the trick

Singapore/New York — As the market euphoria to China’s biggest stimulus since the pandemic settles, foreign investors are now asking whether the $114bn toolkit will provide the spark needed to turn about a beat-up stock market.

Chinese equities have lagged behind major markets all year, despite a series of piecemeal measures authorities have rolled out to revive the anaemic economy and lift stock prices.

This week’s measures were sweeping. The package of rate cuts and, importantly for markets, an 800-billion yuan ($114bn) facility to fund stock purchases showed Beijing’s new urgency to cure the world’s second-biggest economy of deflation and a distressed property market.

Chinese stocks soared, with the blue chip index CSI300 wiping out its losses for the year and set for strongest weekly performance since 2022. The yuan rose to a 16-month high against the dollar.

On Thursday, China’s leaders pledged to support the struggling economy through “forceful” interest rate cuts and adjustments to fiscal and monetary policies, adding more fuel to the rally.

Investors said that reaction showed how depressed sentiment was but the measures did not fix what most overseas investors want to see fixed: fiscal measures that directly spur consumer demand.

The package was mostly about “getting liquidity into the markets, but we’re at a point in which more liquidity alone isn’t going to deliver the sustained recovery long-term investors want to see”, said Phillip Wool, head of portfolio management at Rayliant Global Advisors.

“As long as demand remains as weak as it has been, nobody’s going to want to borrow, and measures like these won’t have the desired impact,” Wool said.

Chinese stocks have stuttered in recent years even as markets elsewhere scaled record peaks, leading investors to pull out and stay away, with over a quarter of global funds tracked by Copley Fund Research not holding any exposure to China at all. Almost all funds kept China exposure in 2021.

While the CSI300 index and Hong Kong’s Hang Seng have surged in the past two days, they remain down 40% from February 2021 peaks. In comparison, Japan’s Nikkei is up 24% and the S&P 500 has risen 45% in the same period.

For Gary Tan, portfolio manager at Allspring Global Investments, this week’s measures are unlikely to lead him to shift his underweight position on China.

“We think it will take a fundamental change in China’s deflation outlook and the China property market for investors to commit new funds into China,” Tan said.

Vivian Lin Thurston, portfolio manager for William Blair’s emerging markets growth strategy, is underweight China and mostly unswayed by the new measures.

However, Thurston said her fund could potentially add to certain stocks that show improved fundamentals and are less affected by the economic backdrop.

Cheap stocks

The success of some of these measures, including ones aimed at capital markets, will depend on whether institutional investors feel comfortable to come back into equities.

China risks missing the 2024 economic growth target of about 5% due to property downturn and frail consumption, which analysts say can only be fixed by fiscal policies that put money into consumers’ pockets.

“Meaningful and effective fiscal stimulus needs to come through in order to address these key economy challenges effectively,” said Thurston.

To be sure, some investors, such as Jonathan Pines, head of Asia ex-Japan at Federated Hermes, and Rayliant’s Wool are attracted by the valuations.

The Shanghai benchmark index trades at price-to-earnings ratio, a commonly used valuation metric, of 12, while the Nikkei trades at 21 and the S&P 500 at 27.

In particular, Bob Zhang, managing partner of Beijing-based Pine Street Capital, likes stocks that focus on AI computing power, semiconductors and software as a service, which he expects as cheap and benefit from global technology developments.

Investors also point to the fact that China is pulling out the stops at the same time that the US Federal Reserve has started cutting rates.

“If the US continues to cut interest rates as expected, and China continues its policy easing, I believe the market will form positive feedback and continue to rise,” said Zhang.

Reuters