Both Chinese and Hong Kong indices were up about 5% in the past week after a slew of positive news.
Many individually well known stocks are up more than 10% off the back of this strong broad based performance too.
Is the China bull market finally back? Or will this run be another unsustainable short pump? Let’s find out:
4 reasons for the China Bull Run
1) Politburo meeting
The Politburo is the decision making body of the Chinese Communist Party and of China. It holds monthly meetings, with the meeting held in July 2023 being exceptionally noteworthy.
The Politburo comprises of China’s most senior officials which includes President Xi Jinping and Premier Li Qiang.
This meeting began by acknowledging that the economy was facing new difficulties and challenges. The main challenge identified was insufficient domestic demand, while other challenges include companies facing operating difficulties and a challenging external environment.
The meeting emphasised the urgency of greater government investments with faster issuance and utilisation of Local Government Special Bonds (LGSB) and follow up with more infrastructure stimulus, such as expansion of policy bank financing to replenish equity investment of LSGB linked projects.
2) Easing regulatory situation
Regulatory situation has further eased. China is showing support for tech’s investments and also strengthened its support for private businesses. Policymakers have asked tech giants including Tencent and Meituan to provide case studies of their most successful start-up investments while the central bank called on lenders to help fund technology research and M&A deals.
Also, the Chinese government this week approved 88 new video game licences to underline its pivot since state-run media called them “spiritual opium” during the years-long clampdown. More than 600 games have made it into the market this year, surpassing 466 in all of 2022.
Tencent Games — the parent company of developer Riot Games, which also makes League of Legends has officially launched Valorant in China on 12July 2023 after it finally received approval on 29 Dec 2022. The game comes online in China three years after it launched globally in June 2020.
3) Change in tone towards property market
China omitted President Xi Jinping’s official slogan on curbing housing speculation at a key economic policy meeting, underscoring a deeper shift toward supporting the property market.
China also said it would optimise and adjust policies for the property sector to stabilise the economy. This tweak comes after China’s leaders opined that demand and supply in the home market have seen fundamental changes.
4) Dovish monetary policies
China’s policymakers are dovish. China is showing more resolve to boost growth and continued monetary easing was discussed too. China indicated further cuts in policy rates such as interest rates and Reserve Requirement Ratio (RRR) would be on the table this year.
This will boost loan books as well will reduce default rates. Banks have also been asked to speed up the provision and issuance of loans and bonds.
20+ China stocks that ran last week
Looking at US ADRs:
- Alibaba was up nearly 10% for the week and broke through the $100 psychological barrier.
- Futu was up nearly 30%
- Xpeng was up nearly 60% off the back of a strategic investment by Volkswagen.
- and more:
Stocks listed in Hong Kong and China also did well, for example:
- Ping An was up 10% for the week,
- Kweichow Moutai up 8%,
- Anhui Conch Cement was also up 8% for the week
- and more:
So, will this rally last? And should you be buying now?
Let’s take a look at how the Chinese stock markets are doing on all fronts:
Is the latest China Bull Run sustainable?
The Chinese stock market has let down investors with the prolonged crackdowns and false breakouts. Usually a broad based and steady rally shows investor confidence. While we can venture to say it may be sustainable this time, there needs to be continued positive news flow periodically to ensure the rally continues.
It may be useful to consider whether it is sustainable from the following 3 perspectives:
1) Fundamentals
There is now monetary policy stimulus as well as fiscal policy support for growth across many industries, even the ones who were hit by the regulatory crackdowns. In the US market, the focus is on a mix of growth and profits. For Chinese stocks, we think that growth will be the more important signal first and something to look out for after years of stagnation.
2) Political
Regulatory clampdowns are part of the investing cycle. Most investors who have been vested in Chinese stocks for at least 10 years would know that this is not the first regulatory crackdown, but it may possibly be the worst in recent times.
When the message from China changes, it tends to stay its course until objectives are achieved. In this case, the focus now is on support and growth and would likely stay its course.
To this note, we think that while there may be small regulatory actions as part of a robust system, it should be isolated rather than harsh and broad based, otherwise investors will need to re-assess the situation again.
3) Technical analysis
This is what we mean by, “third time’s a charm”.
The HSI has been on a downtrend since the start of the regulatory crackdowns 2 years ago. There were 2 attempts at rebounding above the downtrend line in July 2022 and February 2023 which did not work out, this is the third time the index is attempting to break out.
Should the index be able to hold above current levels and break up further and form a meaningful uptrend pattern, key levels to look out for would be 20.9k and 22.8k.
Breaking through 22.8k levels would be extremely bullish.
5 areas to look at for opportunities in China Stocks currently
1) Tech
Alibaba is top of the list with news of restructuring, potential spinoffs, IPOs. Tencent and Meituan both benefit from higher consumer spending as well as support for the tech and platform industry.
2) Consumer goods
As economic growth improves and consumer confidence recovers, stocks such as Haidilao, Li Ning, Anta Sports Kweichow Moutai should benefit.
3) Property developers
The biggest names such as Country Garden and Chinese Overseas Land would definitely benefit from policy relaxations.
4) Value stocks
Due to the suppressed valuation, there are many stocks that are undervalued from a fundamental perspective. Noteworthy mentions are Huya and Douyu. In the case of Huya, the company boasts $1,225 million in cash after deducting for all its liabilities, surpassing its market capitalization of $796 million. Similarly, Douyu possesses a net cash of $731 million, which is more than double its market capitalization of $358 million.
5) Financials (China banks)
Lastly when the overall economy benefits, the Big 4 Chinese banks such as ICBC and Bank of China are natural beneficiaries.
Should you be skeptical?
Yes you should be – all good investors are.
In China’s case, there was a lack of specifics from the Politburo meeting. China’s communication to the world has always been lacking and prefer to perform via actions and results. Hence, we should look out for actions and results rather than mere words.
