China takes centre stage
Over recent weeks, developments in China were among the main headlines across business media channels. After several years of underperformance when compared to the US stock market and other major stock exchanges worldwide, the Chinese equity market experienced a remarkable rally in a very short period of time.
Chinese equities performed poorly over recent years reflecting a lack of confidence in the country’s ailing economy. Prior to the recent rally, the CSI 300 Index was 45% below its all-time high of 5,877 points which was reached in October 2007.
The background to the major equity market rebound over recent weeks was the very aggressive monetary and fiscal stimulus announced by China’s Central Bank at the end of last month. The People’s Bank of China (PBOC) unveiled a lending facility of up to USD114 billion to boost the stock market by lending to asset managers, insurers and brokers to buy equities, and to listed companies to buy back their shares. These measures are reminiscent of those taken by central banks such as the US Federal Reserve in the wake of the 2008 financial crisis. The significant injection of funds into the stock market justifiably led to renewed investor enthusiasm especially among retail investors.
On the same day that the PBOC announced these measures, China’s securities regulator published a document on “market cap management”, a set of proposals that will put pressure on companies whose shares are trading below their book value to take action and boost investor returns.
Moreover, the PBOC also introduced lower mortgage rates for around 50 million households, announced a reduction in the amount of money banks must hold in reserve deposit with the Central Bank to the lowest level since at least 2020, and reduced a key policy rate by 0.50 percentage points. These stimulus measures, which were the most aggressive since the COVID-19 pandemic, were intended to stimulate the Chinese economy after it became clear that the country might miss its 5% GDP growth target for 2024. These efforts were focused on both the languishing stock market and to boost the ailing property market (a very important component of the Chinese economy and overall consumer sentiment) which is still struggling from the COVID-19 pandemic and also from the collapse of Evergrande (China’s second largest property developer at the time) in 2021. It is estimated that the real estate, construction and materials industries make up about 30% of GDP while property accounts for about 60% of household wealth.
As these raft of stimulus measures were announced, the response on the equity market was unsurprisingly immediate. Two of the main benchmark indices tracking Chinese equities, the CSI 300 and the Shanghai Composite index (SSE), climbed in excess of 8% on the day for the biggest daily gain since September 2008. The renewed enthusiasm for Chinese equities continued for a few days with the major indices surging by more than 30% in the two weeks following the stimulus announcement on 24 September and daily trading volumes hitting the highest levels in nine years.
Separately, the Chinese government hinted at additional fiscal support to achieve its economic growth targets.
The rally in Chinese equities peaked on 8 October and became increasingly volatile in October as caution overtook euphoria following the stimulus measures in September. In fact, on 9 October, the CSI 300 suffered a loss of 7% (its largest daily decline in four years) ahead of the press conference by the Finance Ministry later that week on further details on the stimulus measures and possible additional fiscal support.
No new fresh stimulus measures were announced by the Chinese Finance ministry on 12 October but the government instead focused on measures regarding increased debt issuance to alleviate debt problems, subsidies to low-income people and unspecified pledges to stabilize the local real estate market. The total size of China’s stimulus package is estimated to be about
USD1.1 trillion, equivalent to 6% of the country’s GDP. In monetary terms, this package could turn out to be China’s largest in history exceeding previous packages implemented during the global financial crisis in 2008 and during the COVID-19 pandemic.
Analysts’ expectations for an even greater package by the government of an additional USD500 billion of economic support were based on the fact that multiple macroeconomic indicators for the Chinese economy were already showing weak signals. Recent data revealed continuous contraction of the Chinese manufacturing sector while unemployment rose to 5.3% in August (youth unemployment remained at the concerning level of 18.8%). Moreover, September inflation data confirmed the deflationary environment.
Since the pandemic, China has set itself an official target for economic growth of about 5%. Although it achieved 5.2% GDP growth in 2023, this is expected to edge down to 4.8% this year and to 4.3% in 2025 according to estimates from the World Bank.
In terms of sector specific price performance, the top performing sectors since the stimulus was announced have been Technology with a 29.1% gain followed by Consumer Discretionary at +23.4% as the government support for consumption reignited investors optimism in those sectors. Several notable names in the Chinese tech and e-commerce sectors that exhibited significant double-digit gains included Alibaba, JD.com and Tencent.
As expected, Chinese real estate sector companies also benefited in terms of equity market performance with a 12.2% gain as the support measures were aimed to alleviate the built-up stress in China’s highly indebted real estate sectors.
Moreover, the stimulus package also positively impacted European luxury brands such as LVMH, Hermes and Richemont which are very dependent on China. In fact, the weaking demand in China saw a significant decline in sales by these companies during the course of 2024. Following the stimulus announcement, the share prices of these luxury brands briefly rallied by more than 15% as these measures are poised to rejuvenate consumer spending in the region.
Despite the recent rally experienced by the Chinese market, equities still appear to be undervalued on a relative basis with a forward price to earnings (P/E) ratio of just 10 times. This compares favourably to the ratios for the S&P 500 and FTSE All World indices which stand at 24 and 20 times respectively. Nonetheless, the key for the rally in China to continue going forward, and for the valuation discount to narrow, is dependent on the ability of this package and potential future ones to address the structural problems of the Chinese economy (deflation, high level of government debt and the bleak outlook for the real estate sector) which have been plaguing investor sentiment in the region since the COVID pandemic. One of the major investment banks in the US opined that the Chinese equity market could rise by another 20% if authorities deliver on their promises.
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