Investors finally believe in Chinese stocks
For many months and years, the economy of China had been relatively weak. The expected post Covid economy boost never really came and Chinese stocks had been a bad investment. The economy has not been the only reason, but also the possibility for an escalating China Taiwan scenario. Now, investors finally believe in it and throw out the worries.
What boosted the hard run up in equities?
The boost in equities was made possible by the People’s Bank of China. They moved to lower the amount of cash that banks must hold on hand. They also cut the benchmark interest rate on reverse repurchase agreements. They also cut mortgage rates for existing home loans, added new structural monetary policy tools to support the stock market etc. So far, every time the central bank tried to stimulate the economy it somewhat backfired as no one believed it would help enough. Now they came with a bazooka and investors are liking it (for now).
What did we do?
We had built a solid exposure to China over the last 12 months, with significant holdings in Alibaba and KraneShares CSI China Internet ETF (KWEB). The main reason for the exposure was the exaggerated underperformance of Chinese equities against the rest of the world. This could endure, but some exposure seemed to make sense for a reversal. Though, after the 35% and 45% rallies respectively recently, we have taken some profits and keep smaller long positions for now. The Hang Seng Index rallied over 30% and definitely caught a bit up with where it probably should be.
Economic issues not solved
The economic situation remains vulnerable. The economy keeps facing headwinds. Industrial production numbers over the last months have shown strong contractions versus a year earlier. Retail sales and also the Chinese (commercial) property business remain very weak.
The issue remains that China is trying to focus more on throwing money stimulus packages into the economy, in stead of tackling the economic problems by changing and reversing policies. A wiser macro-economic set of policies and economic reforms would be rationally the way forward. It is great that Chinese shares get a boost now as forces start to believe that lowering rates and stimulus measures will finally help. But the risk of the epic boom and bust as we saw in 2015 remains real.
What’s NExt?
A realistic scenario is that the bull run continues for a few weeks but that then profit taking will take place more and more towards the US elections. In a Trump victory, Chinese equities can easily drop heavily back down. Or in case that the recent stimulus packages are missing the expected economic results.
In our newsletter we will keep a strong focus on China.
