Chinese stocks resumed declines on Wednesday, underscoring the need for authorities to act quickly for the market to sustain the sharp rebound seen after policymakers’ latest pledges to revive the economy.
(Bloomberg) — Chinese stocks resumed declines on Wednesday, underscoring the need for authorities to act quickly for the market to sustain the sharp rebound seen after policymakers’ latest pledges to revive the economy.
The Hang Seng China Enterprises Index, which tracks major Chinese companies listed in Hong Kong, dropped 0.8% after surging 5.3% in the previous session. A Bloomberg Intelligence gauge of real estate stocks was little changed following a 10% jump.
A swift follow-through of actionable policy measures, especially those for the property sector, will be key to extending the rally in stocks, Laura Wang, chief China strategist at Morgan Stanley, wrote in a note. An early recovery in sentiment could recede in their absence, she added. That view speaks to the caution seen among investors given that Beijing has repeatedly fallen short of expectations for stronger economic stimulus.
Chinese assets from stocks to the yuan and corporate bonds rallied Tuesday on Beijing’s latest signaling of using further property easing and a consumption boost to revive the economy. The enthusiasm emerged after months of entrenched pessimism plagued markets against the backdrop of weakening data and geopolitical tensions.
“More details for solutions for longer-term structural challenges need to follow through in the coming months – this, along with further stabilization in geopolitical uncertainty, is necessary for a more sustainable equity market recovery,” Wang wrote.
Morgan Stanley reiterated its one-year base-case target of 70 for the MSCI China Index. That implies a potential upside of about 11% from its current level.
In the currency market, the offshore yuan swung was down 0.2% against the dollar after gaining 0.7% Tuesday.
Tactical Window
On the mainland, the benchmark CSI 300 Index of stocks slipped 0.2% after climbing 2.9% in the previous session, the most since late November. Foreign investors were net buyers of 515 million ($72 million) of onshore China shares via trading links with Hong Kong. They bought 19 billion yuan worth of equities on Tuesday, the highest since late 2021.
While Goldman Sachs Group Inc. also believes policy follow-through and implementation is required to sustain the recovery trade, strategists there say the window for a tactical bounce in Chinese stocks is now open.
“While structural growth concerns abound, the meeting reaffirms our view that the policy put has been activated,” strategists including Kinger Lau wrote in a note. The policy easing rhetoric from the meeting could be seen as an upside surprise relative to low market expectations as investors “aren’t fully prepared and positioned for a dovish policy tilt,” they said.
Wang of Morgan Stanley pointed to late August or September, as a major Communist Party conference approaches, as a time frame to anticipate more structural reform plans, centering around state-owned companies and debt-saddled local government financing vehicles.
‘Whatever It Takes’
Chinese stocks have largely been in a downtrend since the end of January, when a three-month surge driven by the nation’s reopening from Covid curbs fizzled out. The Hang Seng China gauge had rallied about 50% in that period. Investors have sold into intermittent rallies since then, showing a lack of conviction in a market that’s headed for another year of losses.
“Looking ahead with a tempered sense of optimism, the pace of economic recovery could be expedited if further targeted policy stimulus is implemented to underpin growth and ensure liquidity,” China Asset Management wrote in a report, adding that it expects sectors such as undervalued property and pan-consumption to be the first to “reap the benefits” of incremental policy support.
“Yet the journey is predicted to be a grinding one, marked by back-and-forth movements.”
The Hang Seng China stock gauge is down 2.3% so far this year. It slumped 19% in 2022, capping a third straight year of losses, the longest on record.
“The size, scope and timing of any stimulus package will determine whether we’ve seen the worst,” said Julien Lafargue, chief market strategist at Barclays Private Bank in London. “In our view, we are probably past the point of peak pessimism and therefore we could see some upside in coming weeks. Longer-term though, it’s all about Chinese authorities commitment to do ‘whatever it takes’ to meet their growth targets.”
–With assistance from Charlotte Yang, Wenjin Lv, John Cheng and Henry Ren.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.