Chinese Stocks Rebound Amid Hopes of Market Rescue Plan
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US-listed Chinese stocks are trading higher in US price action today following a 2.6% gain in the Hang Seng index amid hopes of a market rescue plan by the government.
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 stocks have closed in the red for three years
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.
Investors have been quite bearish on Chinese stocks. In a research note, Goldman Sachs analysts said, “The past three years were no doubt a challenging and frustrating period for investors and market participants in Chinese equities.”
They added, China … [is] currently trading at suppressed valuations and decade-low allocations across [investment] fund mandates.”
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. The Chinese Central Bank has also kept policy rates on hold while markets were expecting a rate cut.
China is reportedly considering a rescue package
Bloomberg reported that China is aiming to garner 2 trillion yuan ($278 billion) mainly through offshore accounts of Chinese state-owned companies to purchase Chinese stocks onshore through Hong Kong markets in a bid to calm nerves.
“We must take more powerful and effective measures to stabilize the market and confidence,” said Chinese Premier Li Qiang during a State Council meeting.
He added, “It is necessary to enhance the consistency of macro policy orientations, strengthen innovation and coordination of policy tools, consolidate and enhance the positive economic recovery, and promote the stable and healthy development of the capital market.”
Markets welcome reports of rescue package
Markets have welcomed reports of a rescue package in China. “China’s stock market package is a welcome measure and shows increasing responsiveness from the authorities. But at under 2% of its GDP, we fear this is still inadequate,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management.
Mitra added, “Considering how cheap Chinese stocks have gotten and how under-owned they now appear, I would not be surprised by a short-term boost in sentiment and prices. But I doubt its sustainability unless these are complemented by a broader package of far-reaching reforms.”
Meanwhile, there is a view that the stimulus might not fix the problem. “Reports of the rescue package has seen an evergreen question resurface; will it be enough to turn the ship around? And early market reactions suggest traders are underwhelmed, likely because the package does little to fix the actual problem,” said, Diana Rulke, professor, at Tepper School of Business, Carnegie-Mellon University.
Chinese stocks trade at depressed valuations
After their underperformance, Chinese stocks trade at depressed valuations. The country’s tech crackdown and the growing rivalry with the US are not helping matters.
The threat of US sanctions is real and in November Alibaba scrapped the IPO of its cloud division. While releasing its fiscal Q2 2024 earnings, Alibaba said that it shelved the IPO plans “in light of uncertainties created by recent U.S. export restrictions on advanced computing chips. Instead, we will focus on developing a sustainable growth model based on emerging AI-driven demand for networked and highly scaled cloud computing services.”
Notably, the US has banned the exports of high-end chips to China which might hamper the AI ambitions of Chinese tech companies.
China’s tech crackdown
Chinese tech companies have also been under a scanner amid the continued tech crackdown in China. After a brief lull and signals that the world’s second-largest economy is done with the crackdown, last month China proposed new regulations for online gaming that made markets apprehensive about the sector.
For perspective, China’s tech crackdown began towards the end of 2020 and Alibaba was the prime target. The company’s co-founder Jack Ma made comments critical of the Chinese regulators ahead of the planned IPO of its subsidiary Ant Financial.
Meanwhile, even as China mulls a rescue package for markets, Chinese stocks have been almost “uninvestable” for many fund managers including Cathie Wood who sold off all the Chinese stocks that she was holding in the portfolios.
