The Chinese Market Is Finally Growing. What Pushes It Up and How Long Will It Last
On Friday, Beijing moved to concrete measures to address two of the most pressing issues for the country’s economy - COVID-19-related restrictions and problems in the real estate sector. The news instilled optimism in investors and provoked a rally in the stock market
Chinese stocks jumped sharply during the trading session on Friday on the back of easing domestic anti-covid restrictions and encouraging US inflation data. The rally continued in trading on Monday, this time under the influence of promises of new measures to support Chinese developers from the government.
In total, over the two trading days, the Hang Seng index added 9.5% and reached 17619.72 points, CSI 300 - 3794.0171 points (+2.94%), Hang Seng Tech - 3554.39 (+12.03%).
It can be assumed that analysts’ forecasts are beginning to come true: Goldman Sachs experts have previously stated that the removal of covid restrictions could become “one of the most visible, long-awaited and powerful catalysts for market growth” and lead to an increase in Chinese stocks by 20%.
On Monday, overseas investors poured 16.6 billion yuan ($2.4 billion) into Chinese stocks, the largest since December 2021. During the previous trading session on Friday, foreign investor purchases reached 14.7 billion yuan.
What made investors happy
Relaxation of “zero tolerance for COVID-19” policy
The Chinese government is taking a tough course in combating the spread of COVID-19, which leads to adverse consequences in the economy: travel restrictions negatively affect the work of the tourism sector, regular lockdowns turn into a strong drop in domestic demand, and the need to suspend production causes a decrease in output and exacerbates supply chain problems.
At the beginning of the month, speculation appeared on the Web about the possible lifting of part of the quarantine measures, which, however, were immediately refuted by representatives of the PRC health system and the government.
However, at the end of last week, a message appeared on the official portal of the government about the easing of a number of restrictions:
- Mandatory quarantine for those who have been in contact with the infected, as well as foreign tourists, is reduced from seven to five days.
- Travelers are now required to take one COVID-19 test instead of two.
- The authorities stop tracking secondary contacts - that is, not directly with the sick person, but with those who came into contact with him.
- The system of punishments for airlines for importing infected people into the country is canceled.
- The division of districts into two groups according to the risk of infection - high and low, the average level is abolished.
US inflation
In October, US consumer price growth slowed from 8.2% to 7.7%, the lowest since February 2021. Inflation was also below Wall Street’s forecasts, with analysts expecting a figure of 8%.
Core inflation (not taking into account food and energy prices) fell from 6.6% to 6.3% against expectations of 6.5%.
A larger-than-expected decline in price growth gave investors hope for a faster slowdown in Fed rate hikes at the next meetings.
Against this backdrop, the S&P 500 broad market index jumped 5.5%. Positive dynamics, in turn, spread to Asian stock markets.
Geopolitical background
US President Joe Biden and Chinese President Xi Jinping agreed to hold a diplomatic meeting in Bali on November 15-16, where the G20 summit is being held. The two leaders met for the first time since Biden took office.
The meeting is taking place in the context of a tense situation in relations between the two largest economies in the world: economic contradictions and disputes over the confrontation between China and Taiwan have become a stumbling block.
Fears of a new round of tension were sparked by the publication of a national security strategy paper last month. In it, Biden for the first time called China “America’s greatest geopolitical challenge” and noted that the country is “the only competitor that has both the intent to change the international order and the economic, diplomatic, military and technological power to achieve this goal.”
At the beginning of the talks on Monday, the US president’s position sounded less radical: he said that the leaders of the countries “are united by a common responsibility to show that China and the United States can manage their differences and are able to prevent the rivalry from turning into something approaching conflict, as well as find ways to work together on pressing global issues that require our mutual cooperation.”
Real estate sector
On Friday, Chinese authorities unveiled a new package to deal with a massive crisis in the country’s real estate sector that has weighed heavily on its economy. The plan includes 16 points, which are aimed at softening the conditions for lending to the sector.
Key measures :
- Allowing banks to extend the terms of repayment of loans by developers.
- Maintaining sales by reducing the size of the first installment and mortgage rates.
- Expansion of financing channels by issuing bonds.
- Ensuring the delivery of houses to buyers who have purchased housing before the completion of construction work.
“Essentially, politicians have advised banks to do whatever they can to support the real estate sector,” said Larry Hu, Macquarie Group’s chief China economist. Tao Wang, chief China economist at UBS, called the package a “turning point” for the country’s real estate sector.
Along with other measures taken earlier this year, this could inject 1 trillion yuan ($142 billion) into the industry.
During trading on Monday, shares of the largest Chinese developers showed a sharp increase. Country Garden added 45.5%, Longfor Properties - 16.48%, Dexin China - 110.9%, Evergrande - 8.5%
The liquidity crunch experienced by Chinese real estate developers, as well as consumer distrust in the industry due to the general weakening of economic dynamics and severe restrictions due to COVID-19, led to a drop in business activity in the Chinese real estate sector, with sales of the top 100 real estate developers decreased by 26.5 in October % year-over-year, according to a private survey by China Index Academy, a leading real estate research firm. Since the beginning of the year, sales have fallen by 43%.
The real estate sector is of particular importance to China’s economy, accounting for a quarter of the gross domestic product.
Analysts welcomed Friday’s government decision, but were cautious about its potential impact on consumer confidence.
“The real estate market has yet to show signs of recovery,” Nomura said in a research report on Monday, noting that the latest measures could have a “little direct impact” on stimulating home purchases. “The zero tolerance policy for COVID-19, despite some recent changes, will continue to put pressure on the real estate sector,” they added.
Citi economists noted a major shift in regulators’ stance towards developers, from “imposing restrictions” to “providing support” and from “rescuing projects but not developers” to “rescuing both developers and projects”. They also described the latest package as “the most comprehensive to support the struggling real estate market.”
How long will the stock market rally last?
According to Shen Meng, director of Beijing-based investment bank Chanson, “shifts in two major policy areas - the real estate sector and restrictive measures due to COVID-19 - will improve investor sentiment in the short term, given the extreme pessimism in the markets.” At the same time, he stressed that over the long term, market performance will depend on the implementation of this policy and how sustainable it will be.
Morgan Stanley strategists also suggest closely monitoring the implementation of the announced measures over the next three to six months.