(Bloomberg) — Xi Jinping’s pledge to revive growth has finally convinced some investors, who have time and again been burned by China’s economic woes.
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Even as skeptics point to a lack of specifics in the latest promises from the ruling Politburo, traders have sidelined weeks of pessimism to boost profits from equities, corporate debt and the yuan.
They are betting that a stronger pro-growth tone from above will be enough to spur a tradable rally — and possibly more success in addressing China’s range of challenges, from mountains of local government debt to a faltering housing market.
“Obviously, markets were disappointed when they expected more rapid improvements, but now they are starting to rationalize their growth expectations,” said Andrew McCaffery, global chief investment officer at Fidelity International. “Our view is that this slightly uncomfortable period will eventually give way to a more positive market tone.”
The big question is whether further measures from the administration will sustain the recovery. Optimism that exploded in the short time that China emerged from strict Covid restrictions has repeatedly turned into losses, making the Chinese market one of the worst performing markets in the region amid a flurry of dismal economic data.
With Monday’s statement from the ruling Communist Party’s 24-member Politburo not specifying specifics, strategists are weighing the nuances. Some Macquarie economists argue that tone is key in China’s top-down system. Others point to a shift in which boosting domestic demand is seen as more important than export-oriented industrial policy.
For the bulls, a stronger acknowledgment of the challenges is enough.
The Hang Seng China Enterprises index, which tracks major Chinese companies listed in Hong Kong, rose 5.3%, its highest level since November as China eased Covid-19 restrictions. The domestic yuan has gained as much as 0.7%, with traders reporting that state-owned banks also support the currency.
On the mainland, the benchmark CSI 300 Index rose 2.9%, also its highest since November. Foreign investors net bought 19 billion yuan ($2.7 billion) of domestic shares through trading links with Hong Kong, the largest daily inflow since December 2021. Sales in Shanghai and Shenzhen were also the highest in three weeks.
The protest was widespread, with interests ranging from retailers to tech companies. Bloomberg’s index of real estate shares rose more than 10%, with Country Garden Holdings Co. 18% increase in Hong Kong. Developers’ dollar bonds also rallied as Beijing pledged to “refine” restrictions to a sector suffering from liquidity shortages and slumping demand.
The Politburo’s language about property – which accounts for up to 20% of GDP after related industries are added – is also softer. It omitted President Xi Jinping’s signature slogan of “home for living, not speculation” for the first time in a mid-term review of the economy since 2019.
Fiona Lim, senior forex strategist at Malayan Banking Bhd. “These admissions are important and may be enough for the market to breathe a sigh of relief, although we may need to wait a while for concrete measures to be passed.”
However, there are many skeptics as Beijing has repeatedly failed to live up to expectations. After all, Chinese stocks have been on a downtrend since the Hang Seng China index rallied about 50% in three months before falling back in late January.
“We’ve seen this movie before,” said Chun Wang, portfolio manager at Minneapolis-based Leuthold Group. “The latest policy signal from the Politburo is not surprising, considering the credit/liquidity crisis that Chinese real estate companies are currently facing.”
Since then, investors have sold into intermittent rallies, showing a lack of confidence in a market headed for another losing year. The benchmark CSI 300 is mostly unchanged this year, while Hong Kong’s Hang Seng Index is down 1.8%, making it one of the worst performing indexes in Asia.
Bulls such as Goldman Sachs Group Inc., UBS Group AG and Morgan Stanley have lowered their expectations for Chinese stocks due to growth concerns. Goldman’s banking analysts have gone a step further, saying investors should sell off the nation’s largest lender and prepare for lower dividend payouts from banks as they face local government debt.
Behind the periodic outbursts of pessimism is a flurry of data pointing to a weak economic recovery, Beijing’s reluctance to deploy large-scale fiscal stimulus and a frosty relationship with Citigroup Inc. USA.
Official figures released last week showed that China’s economy lost momentum in the second quarter, with consumer spending growth significantly weaker in June and property investment shrinking. Meanwhile, home sales fell last month, quickly recovering after four months.
Even Tuesday’s renewed euphoria could be partly attributed to short-term compensating, according to some observers. “It’s good that we have the Politburo and the situation isn’t that bad, a bit warm but enough to lure some investors back into the market and get traders to close short,” said Redmond Wong, strategist at Saxo Capital Markets HK Ltd.
—With the support of Wenjin Lv, Ishika Mookerjee, April Ma, John Cheng and Chester Yung.
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