Hang Seng Index Rises to Multi-Month Highs on China Stimulus Optimism
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The Hang Seng Index rose over 6% today and continued its winning streak to six trading sessions amid the continued optimism over economic stimulus in China. The country has announced many measures to support its sputtering economy which has led to a rally in Chinese shares.
Chinese stocks have been underperforming global peers for the last many years and the Hang Seng Index fell in the previous four years. It lost over half of its value erasing over $5 trillion in market cap. Earlier this year, the size of Hong Kong equity markets fell below the Indian stock market – thanks to the impressive gains in the latter over the previous couple of years.
Meanwhile, the sentiments towards Chinese stocks have improved after the country announced various monetary and fiscal measures that would help it meet the GDP growth targets that the Communist Party set at 5% for this year.
China Announced Stimulus to Support Its Growth
Last week, 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 also announced a 0.2-0.25% cut in the loan prime rate could follow, without specifying whether it would be done for the one-year or five-year tenure. These measures would increase liquidity in the Chinese financial system.
China also announced multiple fiscal measures to support the ailing housing and banking sectors. It would provide cash handouts to the poor, increase child support, and ease property ownership rules.
The property stocks listed on the Hang Seng Index were big winners as China signaled support for the sector which is a key pillar of its economy.
Some Analysts Advise Caution
Meanwhile, some analysts are advising caution amid the splendid rally in Chinese stocks. James Sullivan of JPMorgan is “cautious” about the rally in Chinese stocks as the stimulus measures are mainly targeted at the supply side rather than boosting consumption.
“The million dollar question in China right now is, does [the stimulus] only flow into the supply side of the equation, or does it ultimately flow through into consumer demand? That’s not our expectation right now,” said Sullivan speaking with CNBC.
Morgan Stanley believes that while the stimulus measures would help stabilize the Chinese property market, lifting demand would be tough.
“The continued drag from the property sector will leave a sizable shortfall in demand behind, keeping growth below target,” said Morgan Stanley’s Asia-Pacific economists.
Gary Ng, senior economist at Natixis believes that “investors are betting that the recent policy relaxation will lead to a home market recovery, which should help developers with sales and prices.”
He added, “If home sales do not improve in the next few weeks, it can go back to square one.”
Ng also pointed to the structural slowdown in the Chinese real estate sector which once accounted for a quarter of its GDP and said, “There are more signs of stabilization, but it does not change the fact that China’s real estate sector has entered the twilight of the fast-growth era.”
Chinese Stocks Rally Amid Stimulus Optimism
Meanwhile, the Hang Seng Index as well as the mainland-listed stocks have rallied sharply over the last week. In fact, last week was the best week for Chinese stocks since 2008 and the Hang Seng has risen to a 20-month high amid the stimulus optimism.
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, in Q1 2024, several hedge funds took a position in 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.
Appaloosa Management Bought Chinese Stocks After Fed Rate Cut
Tepper said that he doubled down on Chinese stocks after the Fed rate cut and said that he is buying “everything” related to China after the country’s massive stimulus.
The call seems to be going right – at least in the short term – as while US stocks have looked shaky amid the escalating tensions in the Middle East, Chinese stocks have continued to rally.
