The China pivot

The Chinese market is back in a bullmarket. So what has actually changed? Beijing has launched what seems like a powerful stimulus package:

Lower interest rates
Lower reserve requirement for banks by 50 bps. PBOC has opened a lending window of 100 billion USD, where financial institutions can borrow money, against bonds as collateral, to buy the equity market.

The government will limit new production of property. Surplus unsold inventory of houses will be aquired by the local governments and transformed into rental housing.

Lower mortgage rates by 50 bps.
Reduction of downpayment to only 15%.
Abolish the HPR regulation, ie. You will be allowed to buy property anywhere, also in tier 1 and 2 cities, even if you dont have citizenship there. This might be a first step to deregulate the ”Hukou system”.

A decisive message last week from the politbureau to put a floor under the property market to stop prices from falling further

Also to give support to the chinese consumer. Foodstamps for lower income groups will be distributed.

All of this is good, but it is all about supply side management. Very little has been done so far about the demand side. No announcement about increased fiscal spending has been made yet.

The national team has been engaged to buy the market. It has been done before. Government controled banks, insurance companies, brokers and asset managers have been ordered to buy the market, with financing from central government and PBOC.

The hedgefunds have jumped in to cover their short positions, which were att all time high levels.

The rally can go on for some time, 3-6 months perhaps. The market is cheap on face value and previous experience from recovery rallies in China after government interventions, shows performance of 50-80% in a short period of time.

Two recent examples;
From November 2022 until January 2023, when China lifted Covid restrictions, market rallied 60%.
From November 2014 until June 2015, the local Chinese market doubled after intervention from government, encouraging the public to buy stocks.

Longer term China would have to adress the serious structural issues that will limit future economic growth. Poor demographic structure, high unemplyment for young people, severe oversupply and poor profitability in many sectors, weak consumtion as s result of falling asset prices and weak income trend for households and the suppression of private entrepreneurs making them unvilling to invest.

My best guess is that the chinese equity market will develope in a simular fashion as the Japanese equity market did in the nineties, sharp recovery rallies followed by disapointment and corrections. The structural issues in China will take a decade to solve, if there is a serious political will to alter the direction of the economic policy. I seriously doubt that Xi Jinping is willing to abandon his conviction of the Marxism-Leninism ideology.

/ Gunnar Påhlson, 24-10-02