Chinese Stocks Surge After Its Central Bank Announces Stimulus Measures
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US-listed Chinese stocks are trading higher in US price action today following a 4.1% gain in the Hang Seng index after the Chinese central bank announced a flurry of stimulus measures to lower borrowing costs in a bid to support its sagging economy.
Despite the gains today, Chinese stocks remain in the negative for the year and are among the worst-performing markets. The underperformance is not limited to 2024; last year, mainland China’s CSI 300 index fell 11.4%. The index has closed in the red for three years underperforming major Asian and global markets.
Chinese Central Bank Announces Stimulus Measures
At his press conference today, People’s Bank of China (PBOC) Governor Pan Gongsheng announced that it will cut reserve requirement ratio (RRR) – which is the cash banks need to have on hand – by 50 basis points. While Pan did not spell out the timeline for the cut he said that the Chinese central bank would cut the RRR by another 25-50 basis points by the end of the year. Pan also announced that the PBOC will cut the 7-day repo rate by 20 basis points.
Pan further touted a 0.2-0.25% cut in the loan prime rate, without specifying whether it would be done for the one-year or five-year tenure and its timeline.
Lynn Song, chief economist for Greater China ING, termed the repo rate cut “the most important” announcement from the PBOC. “Markets had been leaning toward expecting multiple 10bp rate cuts, so a 20bp cut represents a slightly stronger than expected move,” said Song in his note
He added, “However, the net impact will depend on whether we see further cuts ahead or whether the PBOC falls into a wait-and-see mindset after today’s policy package.”
Song sees the announcements as a positive for Chinese stocks. He said, “We feel today’s measures are a step in the right direction, especially as multiple measures have been announced together, rather than spacing out individual piecemeal measures to a more limited effect.”
Would the Stimulus Measures be Enough
Song said that the PBOC has room to cut rates further as its counterparts globally have also pivoted to accommodative monetary policy. Notably, the US Fed lowered its benchmark rates by 50 basis points last week and other central banks are also expected to follow suit.
According to Song, “If we see a large fiscal policy push as well, momentum could recover heading into the fourth quarter.
Meanwhile, even as Chinese stocks soared today after the stimulus measures, not all are convinced that these steps would be enough to stem the slowdown in the world’s second-largest economy.
Ecaterina Bigos, chief investment officer of core investment (Asia ex Japan) at AXA Investment Managers said “The immediate reaction is certainly positive for markets because the measures have been more forceful than the previous ones we’ve seen from policy makers.”
However, Bigos added, “But for us to see a sustained impact of all these measures, we need to see some support from the fiscal side as we move to the year end.”
Chinese Stocks Have Underperformed Global Markets
Chinese stocks peaked in early 2021 and have since been sliding and the crash has wiped off $6 trillion in combined market cap of Hong Kong and Chinese shares. Also, Hong Kong recently lost its status as the world’s fourth biggest equity market to India whose stock markets are trading near record highs.
Markets have been concerned about Chinese shares after a flurry of economic data showed that the world’s second-largest economy continues to sag. The country’s real estate and banking sectors continue to be in turmoil and the Chinese government has so far refrained from large-scale stimulus to revive the economy given the country’s already elevated national debt.
US Hedge Funds Have Bought Chinese Stocks in 2024
Many US investors shunned Chinese tech stocks in 2021 after the country’s brutal tech crackdown. While the country has since sounded a more reconciliatory tone towards large tech companies, for many investors Chinese tech stocks are now uninvestable considering the policy uncertainty.
However, this year, several hedge funds have taken a position in Chinese stocks including Alibaba amid the seemingly attractive valuation.
Billionaire investor David Tepper’s hedge fund Appaloosa Management, Saudi Arabia’s Public Investment Fund (PIF), and Michael Burry’s Scion Asset Management are some of the funds that increased their stake in Alibaba in Q1.
Alibaba is now the biggest holding for Appaloosa Management. Tepper also increased his fund’s stake in PDD Holdings and Baidu and along with Alibaba they make for three of the top 10 holdings.
Michael Burry Increased Stake in Alibaba
Burry of The Big Short fame also increased his stake in Chinese stocks. In 2023, Burry had sold all the Chinese stocks that he was holding but now seems to be warming up again.
Meanwhile, Chinese stocks led the gains in Asia today with commodities and commodity shares also rallying on hopes of a recovery in demand from China. However, given the structural challenges facing the Chinese economy and prospects of a worsening trade war with the US, many believe the country might need to do more to address the economic slump.
