China’s promise to support its market is a first step. Here’s what’s needed for a lasting recovery.
China’s promise to support its market is a first step.  Here’s what’s needed for a lasting recovery.

China’s promise to support its market is a first step. Here’s what’s needed for a lasting recovery.

China tried to return to investor goodwill this week with vague but rare assurances of more market-friendly policies and efforts to boost the economy. It acknowledged that its repression of Internet stocks and the real estate market may have gone too far, and promised to reduce costs of Covid restrictions.

The sweeping promises hit the right chord to repair investor sentiment, but a lasting recovery from the painful downturn in Chinese equities and economic downturn will require Beijing to follow up with actions that match its words.

On Wednesday, the reading from a special meeting of policy makers led by China’s top economic official Liu He included promises of more market-friendly policies and proactive measures to support the economy. Government officials also left the impression that the downturn in the Internet sector was winding down and that implementation would be clearer – which met one of investors’ greater fears.

As a nod to the panic that erupted last week when the Securities and Exchange Commission began identifying Chinese companies that were in danger of being delisted, policy makers said they supported overseas IPOs, and cryptically said Chinese regulators made progress on a cooperation plan with the United States to avoid delisting. .

On Thursday, Beijing turned its attention to concerns that China’s strict Covid restrictions would require a painful toll on its economy as Omicron cases rose. Authorities said they would try to limit the outbreak with the least cost.

That wave of insurances acted as an ointment for already cheap stocks that had taken a further dive last week about delisting issuesThe People’s Bank of China, which refuses to lower interest rates, as some had expected, and the concern that China itself may face devastating sanctions if it is unable to remain neutral in Russia’s war in Ukraine.

Though


iShares MSCI China

(MCHI) exchange traded fund and


KraneShares CSI China Internet

ETF (KWEB) -logged double-digit gains on Wednesday, they withdrew again on Thursday and are sitting at losses of 35% and 61% respectively for the past year.

While Beijing may have pulled emotions out of the abyss and improved stock setup, investors need to choose their seats and be aware of China’s challenges in dealing with its economic downturn and its delicate balance in supporting its friend Russia without being drawn into langdrag. deeper into a geopolitical imbroglio.

“This looks more like a temporary response to the current weakness,” Capital Economics senior China economist Julian Evans-Pritchard said via email. “It would be naive to assume that the political and regulatory headwinds facing the technology and real estate sector have now disappeared.”

Following last year’s turbulence, policy makers have prioritized stability for several months ahead of the 20th Party Congress, with President Xi Jinping expected to take a third term – one reason Barrons in January said Chinese stocks could be ready for a turn.

But it’s not smoothly ahead: “The remarks were important to set the tone: That it is not back to Maoism, but it does not change the major problems that are driving Chinese stocks,” said Michael Kelly, global head of multi-asset strategies. at PineBridge Investments, which oversees nearly $ 149 billion, adding that it’s also unclear where the policy will lead after Xi has been anointed for life.

So far, there is little change in Beijing’s core priorities, several of which may contribute to a erosion of margins. That includes its efforts to tackle inequality in part by pushing companies to support social good and create a level playing field for businesses, Kelly says. Also a concern: China’s declining economy. Joyce Chang, global research director for JPMorgan, says the first thing investors will turn to is financial data to see if they support a recovery or have been threatened by Omicron.

Feel-good moods can not be rejected in the short term. While Louis Lau, co-manager of the Brandes Emerging Markets Value Fund, says the policy follow-up should take the form of interest rate cuts and more muscular support for the real estate market. He adds Chinese stocks, particularly Macau gaming and travel stocks, which should benefit from any easing of China’s Covid policies and a possible reopening.

GQG Partners Chairman Rajiv Jain is in favor of cyclical finances as



China Merchants Bank

(3968: Hong Kong), which stands to benefit from increased government spending and lending growth as the economy recovers.

Internet giants at the center of last year’s route are poised to take advantage of a boom in which asset managers such as Ginny Chong, head of Chinese equities at Mondrian Investment Partners, are attracted to dominant companies trading at high discounts, such as



Alibaba Group Holding

(BABA), which has lost half of its market value,



Tencent Holdings

(700.Hong Kong),



Baidu

(BIDU) and



Autohome

(ATHM), which at its lowest level traded for less than its cash.

Some of these companies face challenges that may limit the upside, including regulation that hampers promising areas such as fintech, and the ongoing study of data security. Instead of picking up previous multiples of 20 times earnings, valuations can end up closer to low- to mid-teens, some executives say. At 9 times forward earnings for Alibaba, it still represents upside – though it may come with volatility.

But if US and Chinese regulators compromise to avoid mass delistings, Internet stocks would be among the biggest benefits. But so far, the SEC has not reciprocated China’s more conciliatory tone, and money managers say they are still in favor of Hong Kong-listed versions of those shares given China’s pressure to reduce its dependence on the United States. The SEC did not immediately respond to a request for comment.

Even greater political risks threaten. Congress is debating a bill that would examine outbound investment, potentially hurting China’s long-term investment prospects, and the threat of sanctions is mounting. President Joe Biden and Xi are expected to speak on Friday. If China confirms that it will not offer Russia a lifeline, it could help thaw US-China relations and offer another boost to equities in the short term.

“Equities have triggered a policy but will remain very volatile; this is still a stock market,” said Rory Green, TS Lombard’s Chinese chief economist.

As one money manager looking at Chinese equities stressed: China is not for the faint of heart, but starting to search among the latest wreckage can be fruitful.

Write to Reshma Kapadia kl [email protected]

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