China Focus: Are Investors Being Too Pessimistic?

By Ning Meng

As China accelerates stimulus across multiple sectors, its sluggish economy is showing early signs of recovery, boding well for the A-share market.

For most of 2023, sentiment toward China’s A-share market has been weak. We believe this is due to (1) a weaker-than-expected economic recovery, (2) disappointment regarding the lack of large-scale stimulus policies, (3) geopolitical tensions and (4) worries over the property market, as well as longer-term structural issues.

In our view, the latter will take a while to be better understood. As for the shorter term, although it’s reasonable to worry in a languishing economy, we think investors may have overreacted to recent soft data, resulting in pessimistic sentiment that has negatively impacted the stock market.

Importantly, the Chinese government has quickened its pace in rolling out stimulus over the past few months. In the property sector, mortgage downpayment ratios for both first and second home purchases have been lowered.¹

As the first nationwide easing measure in this sector since 2015, it’s considered a testament to the government’s resolve to steady the economy. Moreover, China has relaxed guidelines for insurance companies to invest in domestic equities, cut the stamp duty on stock transactions by half, and encouraged dividend payouts to stimulate the equities market.²

In the wake of these measures, we’re starting to see emerging “green shoots.” For example, China’s factory activity returned to expansion in August, as shown by the Caixin/S&P Global Manufacturing PMI.

New bank lending also beat expectations as policy easing in the real estate sector helped boost buyers’ sentiment.³ Apart from economic strategies, China and the U.S. have established economic and financial working groups in an effort to stabilize ties.

We believe that the rationale for persisting with a near-term bearish outlook on China has lost its validity after the implementation of a series of measures addressing major areas of concern, considering that policy disappointment was purportedly the primary catalyst for the market’s downturn so far this year.

We believe more policy moves are on the way to further shore up the economy, including allowing local governments to issue special refinancing bonds, subsidies to boost consumption, possible further interest rate cuts and more private enterprise supporting policies like tax and fee cuts.

Policy generally precedes market responses, and such responses can also spearhead the revival of the economic fundamentals. It’s not a given that the market will immediately hit bottom – the downturn often carries an inherent inertia.

However, we believe this presents an appealing phase for repositioning global equity portfolios, especially given that the valuation of China’s A-share market is hovering around historical lows.

Source: (1) People’s Bank of China and National Administration of Financial Regulation; (2) Bloomberg, Reuters; (3) People’s Bank of China

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