Askume Singapore/New York Sep 26 –As enthusiasm for China’s biggest stimulus package since the pandemic wanes , foreign investors are now asking whetherThe $114 billion toolkit will provide the necessary stimulus to revive the falling stock market .
China’s stock market performance for the year has lagged major markets, despite a series of small steps taken by authorities to revive the flagging economy and boost share prices.
This week’s measures are wide-ranging . A package of interest rate cuts and a market-critical 800 billion yuan ($114 billion) in financing stock purchases has helped Beijing stave off deflation and troubled asset markets.
Chinese stocks rose, with the blue-chip CSI 300 index erasing the year’s losses and recording its strongest weekly performance since 2022. The RMB exchange rate against the US dollar rose to a 16-month high.
Gains were further boosted by China’s leader on Thursday’s pledge to support the struggling economy with “strong” interest rate cuts and adjustments to fiscal and monetary policy .
Investors said the reaction reflected how pessimistic market sentiment was, but the measures fell short of what most foreign investors wanted to see: fiscal measures to directly stimulate consumer demand.
Philip Wool, head of portfolio management at Reliant Global Advisors, said the main goal of the program is “to bring liquidity to the market, but we have reached a point where simply adding liquidity will not provide the sustained improvement that investors are hoping for in the long term.”
“As long as demand remains weak, no one will want to borrow money and such measures will not have the desired effect,” Wool said.
A quarter of global funds tracked by Copley Fund Research have no exposure to China, while other markets have hit record highs in recent years, causing investors to step back and stay away. Nearly all funds will maintain exposure to China in 2021.
While the CSI 300 Index and Hong Kong’s Hang Seng Index (.HSI) have risen in the past two days, they remain down 40% from their February 2021 peak. In comparison, Japan’s Nikkei stock average (.N225) gained 24% over the same period , and the S&P 500 Index (.SPX) gained 45%.
Allspring Global Investments portfolio manager Garry Tan said this week’s measures are unlikely to change his negative stance on China.
“We believe China’s deflation prospects and fundamental changes in China’s real estate market will require investors to allocate new funds to China,” Tan said.
Vivian Lynn Thurston, portfolio manager of William Blair’s emerging markets growth strategy, believes that their outlook on China is weak and they are not affected by the new measures.
However, Thurston said his fund would likely invest in stocks that have better fundamentals and are less affected by the economic backdrop.
Cheap Stocks
The success of some of these measures, including those targeting the capital markets, will depend on the willingness of institutional investors to return to the stock market.
China could miss its economic growth target of about 5% this year because of falling wealth and weak consumption, a threat analysts say can only be resolved through fiscal policy that puts money in consumers’ pockets.
“Meaningful and effective fiscal stimulus is needed to effectively address these major economic challenges,” said William Blair’s Thurston.
Of course, some investors, such as Federated Hermes Asia’s ex-Japan chief Jonathan Pines and Reliant Wool, were also attracted by the valuation.
The Shanghai Benchmark Index (.SSEC) has a price-to-earnings ratio of 12, a commonly used valuation metric, while the Nikkei has a price-to-earnings ratio of 21 and the S&P 500 has a price-to-earnings ratio of 27.
Bob Zhang, managing partner at Beijing-based Pine Street Capital, particularly likes stocks focused on artificial intelligence computing power, semiconductors and software-as-a-service, which he believes are cheap and benefit from global technology growth.
Investors are also concerned that China is changing its policies at the same time that the Federal Reserve is starting to cut interest rates.
“If the U.S. continues to cut interest rates as expected and China continues to ease policy, I believe the market will respond positively and continue to rise,” said Pine Street Capital’s Zhang.
(1 USD = 7.0165 RMB)
