Chinese Stock Market Sees Rare Upward Trend, but Clarity Still Lacking for International Investors
The latest positivity around Chinese markets doesn’t yet offer the kind of clarity most international investors are looking for to move beyond selective plays. Chinese stocks ended the week with four straight days of gains — a rare upswing after a dismal start to the year. A combination of official rhetoric, monetary policy moves and media reports helped support the turn higher from multi-year lows. “The litmus test for a more sustained recovery in shares would be sequential improvement in economic data,” David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco, told me Thursday. “I think the bar might be higher this year given the past few years of underperformance.”
Chinese Investors Advised to Pursue Active Strategies in Select Industries
“Investing in China, you have to have an active strategy,” he said, emphasizing the need to focus on industries that receive policy support. Three that Chao mentioned were: high-tech manufacturing, robotics and alternative energies.
Policymakers Signal Willingness to Support Chinese Economy, But Extent Remains Unclear
Policymakers in the last week signaled they are willing to do more to support the economy as a whole, although its unclear to what extent. The People’s Bank of China announced a bigger-than-expected cut to one of their key monetary policy tools, the reserve requirement ratio, effective Feb. 5.
Improved Coordination in Real Estate Market Raises Hope for Broader Stock Market Recovery
On real estate, the PBOC, the high-level National Financial Regulatory Administration and the housing ministry this week also made concerted statements about supporting struggling developers. This kind of cooperation “shouldn’t be taken for granted,” Edward Chan, a director at S & P Global Ratings, told me Friday.
Retail Investor-Dominated Chinese Stock Market Faces Challenges Amid Low Sentiment
Sentiment is low, and the retail investor-dominated Chinese stock market is no exception. Schelling Xie, an individual investor in mainland Chinese A shares, said state-backed buying was helping to support stocks with larger market capitalization versus smaller ones, and expected them to have to sell at some point. “The decline [in A shares] is because confidence has collapsed, the economic fundamentals are too poor and policies are slow to respond to deflation,” Xie said in Chinese, translated by CNBC.
International Funds Cut Exposure to Mainland China, Seek Alternatives with European Proxies
Many international funds are not about to wait around. Asia funds tracked by HSBC have been cutting exposure to mainland China since the beginning of 2023, HSBC analysts said in a Jan. 25 report. As of Jan. 23, foreign institutional investors withdrew $4.3 billion from Asian stocks, mostly mainland China’s and India’s, the report said. In the past six months, foreign investors have pulled around $30 billion from mainland Chinese A shares, the report said. For Citi analysts, that kind of institutional uncertainty about China itself means getting exposure to the market recovery can come through European proxies.
(Source: CNBC)
Analyst comment
Positive news: Chinese Stock Market Sees Rare Upward Trend
Analyst view: The recent upward trend in the Chinese stock market is a positive sign; however, international investors are still cautious. Sequential improvement in economic data will be the key to a sustained recovery. Active strategies in select industries and policy support will drive the market further. However, challenges remain due to low sentiment and institutional uncertainty, leading some investors to seek alternatives in European proxies.
