Key takeaways:
- Following the announcement of China’s latest coordinated and more comprehensive policy measures, Chinese equities have rallied as investor confidence improves.
- Chinese equities currently trade at attractive valuations, with positive momentum seen in the technology, healthcare, and financial sectors, which are the most likely beneficiaries from increased liquidity and supportive policies.
- As global investors seek stability amidst uncertainty, the Chinese government’s decisive stimulus measures could be the catalyst needed to restore confidence and unlock value in China’s markets.
Over the past week, China’s government surprised global markets with a series of significant policy announcements, aimed at boosting economic growth, stabilising the property market, and revitalising the stock markets. This coordinated effort from China’s top regulators—the People’s Bank of China (PBOC), China Securities Regulatory Commission (CSRC), and the National Financial Regulatory Administration (NFRA)—marks a decisive shift from debt control to growth support.
But what does this mean for investors and why do we think it has the potential to be a game changer for China’s economy and equity markets?
China’s policy shift: A week of supportive action
On 24 September, China’s central authorities announced a comprehensive stimulus package designed to address multiple economic challenges. This was followed by an off-schedule Politburo meeting on 26 September, further signalling the government’s resolve to stimulate economic growth. These measures exceeded the market’s expectations, triggering a substantial rally in China’s stock markets over the following days, which resulted in the Chinese equities market falling into technical bull market territory (+24% in September 2024).1
The stimulus package aims to tackle three main concerns for China:
- Economic growth
The PBOC lowered the Required Reserve Ratio (RRR) by 50 basis points. This move released approximately RMB 1 trillion (USD 142.5 billion) worth of liquidity into the financial system, aiming to improve access to funding and support business activities.2
- Property market
To address the ongoing property sector slump, interest rates on existing mortgages will be cut by an average of 50 basis points, offering relief to 50 million households and potentially saving RMB 150 billion (USD21.1 billion) in interest expenses.2 This move should ease financial pressure on homeowners and stabilise the property market in the coming months.
- Stock market revival
The introduction of a RMB 500 billion (USD71 billion) swap facility for brokers and funds to purchase stocks, along with a 20-basis-point cut in policy rates, has injected much-needed liquidity into the market. Additionally, a RMB 300 billion (USD42.2 billion) refinancing facility was established to enable listed companies to conduct share buybacks, a move aimed at boosting investor confidence.3
These measures, combined with the promise of additional support from the government, represent one of the most comprehensive policy shifts we’ve seen in recent years.
Investor sentiment is improving
Following the policy announcements, overall investor mood shifted from scepticism to optimism from expectations that the measures would support economic growth and could potentially lead to a sustained market rally.
China’s equity markets experienced a surge reminiscent of the post-Global Financial Crisis rally. The CSI 300 Index of large-cap shares jumped 16% in one week – its most significant weekly gain since 2008.4 The intensity of the rally’s trading activity overwhelmed the Shanghai Stock Exchange, resulting in processing glitches and transaction delays.
In Hong Kong, the Hang Seng China Enterprises Index climbed for an 11th straight session, marking its longest-winning streak since 2018.5 Investors, both domestic and global reacted with enthusiasm, driving the MSCI China Index up by 22% within four days.6
Why we think this time could be different
Although previous attempts at stimulating China’s economy such as in April 2024, which saw the issuance of long-term special government bonds failing to create lasting momentum, there are compelling reasons why it may work this time round:
- More supportive external environment
The US Federal Reserve’s rate cut in September has created a more favourable environment for Chinese policymakers to implement stimulus measures, reducing concerns about capital flight or currency devaluation.
- Increased sense of urgency
The deterioration of China’s economic fundamentals, particularly the property market downturn and weakening consumption, has reached a point where policymakers see a need for decisive action. This urgency is evident in the off-schedule Politburo meeting and the unusually direct language used in the policy statements.
- More comprehensive and targeted measures
Unlike previous efforts, the measures address not just monetary policy, but also property sector challenges, stock market stability, and consumer confidence. Additional measures may also be announced in the coming weeks.
Implications for investors
China’s policy shift highlights some key considerations for investors:
Chinese equities are currently trading at attractive valuations. The MSCI China Index has a 12-month forward P/E ratio of around 10.3x (as of 30 September 2024),7 making it one of the cheaper markets compared to global peers. This presents a unique entry point for investors looking for value in a market with substantial growth potential.
- Portfolio diversification
China’s low correlation with other global markets, especially during periods of global market volatility, makes it an excellent diversification option for investors. With additional fiscal stimulus measures expected, China could potentially outperform other developed and emerging markets in the coming quarters.
The recent policy announcements have created positive momentum across sectors such as technology, consumers, property, commodity, healthcare, and financials; high-quality companies with strong fundamentals are likely to benefit the most from the increased liquidity and supportive policies.
China represents a strategic long-term investment allocation
The latest stimulus package marks a pivotal moment for the country’s economic trajectory and equity markets. As global investors seek stability amidst uncertainty, the Chinese government’s decisive pivot from debt control to growth support could be the catalyst needed to restore confidence and unlock value in China’s markets. With the likelihood of additional policy support, investors may want to revisit their Chinese equities allocation as it presents an attractive and strategic investment opportunity. Experienced, active investment managers can navigate the complexities of this evolving market.
1,6 Source: Refinitiv Datastream, price return in USD terms. Past performance does not predict future returns. MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). The index covers about 85% of this China equity universe.
2 Source: Reuters, China launches late stimulus push to meet 2024 growth target, 27 September 2024; China to cut existing mortgage rates by the end of October, 30 September 2024.
3 South China Morning Post, PBOC to set up US$71 billion swap facility to prop up stock market, 24 September 2024.
4 Source: Refinitiv Datastream, price return in USD terms. Past performance does not predict future returns. CSI 300 Index tracks the performance of the top 300 A-share (domestic shares denominated in RMB) companies listed on the Shanghai and Shenzhen stock exchanges.
5 Source: Refinitiv Datastream. Past performance does not predict future returns. Hang Seng China Enterprises Index reflects the overall performance of Mainland securities listed in Hong Kong.
7 Source: Bloomberg. MSCI China Index, as at 30 September 2024. Past performance does not predict future returns
Basis points (bp): one basis point equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.
Fiscal stimulus/policy: fiscal stimulus refers to an increase in government spending and/or a reduction in taxes with the aim of improving economic growth.
Forward P/E ratio: is used to value a company’s shares, compared to other stocks, or a benchmark index. It is calculated by dividing the current share price by its earnings per share. Forward P/E uses forecasted earnings, typically for the next 12 months in its calculation.
Large caps: well-established companies with a large market capitalisation (total market value of a company’s issued shares calculated by multiplying the number of shares in issue by the current share price).
Liquidity: a measure of how easily an asset can be bought or sold in the market. Assets that can be easily traded in the market in high volumes (without causing a major price move) are referred to as ‘liquid’.
Monetary stimulus/policy: monetary stimulus refers to measures by a central bank to increase the supply of money and lowering borrowing costs with the aim of improving economic growth.
Reserve requirement ratio: a regulatory requirement typically imposed by a central bank that sets the minimum amount of cash reserves that a bank must hold relative to the amount that it lends. It is a monetary policy tool used to increase or decrease the money supply, as well as to ensure that banks retain sufficient money on hand to meet the needs of depositors.
Share buybacks: when a company buys back its own shares from the market, it leads to a reduction in the number of shares in circulation, and as a consequence increases the value of each remaining share. Buybacks typically signal the company’s optimism about the future and a possible undervaluation of the company’s equity.
Volatility: the rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
IMPORTANT INFORMATION
There is no guarantee that past trends will continue, or forecasts will be realised.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
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