Reason #1: Share price momentum shows recovery in Chinese stock indices
Looking at the performance of the major indices in America, Asia, and Europe, it is clear that the last one month has been quite bloody, with most major indices in the red.
The two major indices that stand out are the Hang Seng Index and the CSI 300 Index which are up 1.7% and 5.7% respectively, much higher than the three major US indices, the Dow Jones Industrial Average, S&P 500 and Nasdaq, which have all declined around 5% in the last one month.
Other risk assets such as cryptocurrencies have also fallen significantly with Bitcoin down nearly 40% to around 18k and Ethereum down more than 50% to around 900 at the lowest this year.
All bear markets come to an end eventually, with China having been in a downtrend since February 2021, many Chinese stocks now have attractive valuations with positive growth outlook after underperforming in last quarters. Some of them have become value stocks which we identified back in 17 March 2022. Many of these stocks have since seen their share prices increased significantly from that day.
There has also been news reports of both western and Chinese hedge funds either adding to their existing positions or entering into the Chinese stock market after a period of absence.
When the outperformance is so significant and momentum so positive, there are usually fundamental reasons. Here we shall dive further into a few fundamental reasons why it is time to buy into China.
Reason #2: Easing of monetary and fiscal policies
The US Federal Reserve (the Fed) is tightening monetary policy, with the aim of reducing inflation to its long term goal of 2%. It has caried out multiple interest rate hike moves and pricing in many more, at least up to 2023. The Fed is also tapering its balance sheet, ending its bond buying programme. And as shown in the chart below, the effect of higher interest rates policy lead to reduced investment and lower economic growth.
China is at the other end of the economic cycle as it is stimulating the economy via both fiscal and monetary policy actions. The Chinese central bank, PBOC have not only enacted rate cuts, it has also carried out lending programs and liquidity injections, unleashing nearly 3 Trillion yuan into the system till date. The fall in interest rates causes many positive effects on the economy as shown in the table below.
The Chinese government also unleashed nearly 10 times the amount of monetary policy stimulus in fiscal policy stimulus, with nearly 33 trillion Yuan in general budget expenditure, loan support via special bonds, and tax and fee cuts for small businesses and certain sectors.
We wrote about some of China’s stimulus plans previously, listing down certain sectors such as infrastructure, Agriculture and Tech that will directly benefit and examples of companies that are in these sectors.
Reason #3: Increasing momentum of positive news flow
There is a clear trend of positive news flow since March 2022 where the Chinese stock market arguably bottomed.
On top of the stimulus mentioned above, Chinese authorities have clearly changed their tune, marking the end of a regulatory crack down that started with the tech sector in November 2020 when Ant Financial’s IPO was postponed indefinitely.
There has even been multiple rumours which were also squashed of Ant Financial receiving its financial holdings license and a potential revival of its IPO which will surely mark the end of it all.
Chinese Vice-Premier Liu He has since spoken out many times, making comments such as saying that the government supported the development of the tech sector and public listings for technology companies in further signs a crackdown on the sector is easing.
The Chinese government has also acknowledged that for China to attain its 2022 GDP growth target of 5.5%, the technology sector will have a crucial part to play. Senior management of various companies has also shown optimism about the Chinese economy in 2H22 as the effect of policy actions in 1H22 take effect.
Reason #4 Worst is over for the real estate debt crisis
On top of the tech sector regulatory crack down, China had to deal with a severe credit crisis in the property sector, with many large developers such as Evergrande and Shimao defaulting. After months of silence, Vice Premier Liu He has also since pledged to shore up the real estate sector with measures such as lower interest rates and other market friendly policies such as providing for loans encourage merger and acquisitions for developers to acquire distressed assets.
The Chinese government has always made its stand clear that Homes are for living in, not for speculating on, however, their actions have shown that they would still take certain measures to support the economy when the situation is dire and calls for it.
Reason #5 International relations in a benign situation
One would ask, why is a benign situation a reason? While this is one reason that may not age well, we think that at least for now, with recessions on the horizon and with inflationary pressures globally, international relations would not worsen significantly. One tell sign is that the Biden administration has repeatedly indicated that it is in the process of considering the lifting of some tariffs enacted under the Trump administration.
There are also rumours of a possible call between President Xi and Biden on the horizon which would surely improve tensions between the two countries and boost trade and economic activity.
Reason #6 One step closer to the reopening of China’s borders and the end of COVID-zero policy
This could be us calling it a little early but with every lock down comes one step closer to the reopening of China’s borders and the end of its COVID-zero policy. While there does not seem like the end is near yet, China has narrowed its mass testing scope where cases are detected, reduced its quarantine period for inbound travellers and even allowed key manufacturing sectors to operate in bubbles so as to balance between its COVID-zero policy and keeping the economy moving. Hence, one can only expect for China’s COVID-zero policies to continue on its easing path.
Closing statement
We have listed 6 reasons why we think it is time to buy China now. The reasons range include momentum of the share price, easing of monetary and fiscal policies, increased positive news flow, possible bottoming of the property debt crisis, calm international relations and even a possible reopening of China’s borders, we would like to leave you with one final thought – even naysayers should follow the trend.
If you’re looking to invest in China, a simple way to get started is through ETFs. We’ve compiled a list of the Best China ETFs. If you prefer to pick your own stocks but don’t know where to start, you can join Alvin at his next webinar where he shares his framework to investing in China.
