Can the Chinese rally last?
Have China’s stocks turned a corner? asks Weilun Soon in The Wall Street Journal. The benchmark CSI 300 index has fallen for the past three years. During the rout, more than $6trn was wiped off stock values – equivalent to roughly double the value of the entire London market. But after an “awful January”, officials cracked down on short sellers, eased financial conditions and encouraged stock buying by state-linked funds. The CSI has bounced 12% since the February nadir.
A “more positive turn” in the economic data has also helped sentiment, says Garfield Reynolds on Bloomberg. Industrial production rose 7% in the year to January and February, yet an “ailing property sector” remains the “market’s Achilles heel”. At least five property developers, including Evergrande, have been ordered to wind up operations. Forthcoming liquidations could “spook foreign investors” and increase the temptation for those sitting on profits to “take the money and run”.
The CSI 300 now trades on about 13 times forward earnings, not vastly cheaper than the 14 times average for all global stocks outside the historically expensive US market, says Ethan Wu in the Financial Times. That doesn’t seem attractive given the risks. China’s government recently announced a 5% GDP growth target, in line with last year’s official figure. “Good luck with that.” The tailwind of last year’s post-Covid recovery is already ebbing; “fiscal and monetary stimulus efforts have been half-hearted”. Old growth drivers are exhausted, with property in structural decline and infrastructure weighed down by high debt. That leaves manufacturing –
Beijing has doubled down on areas such as solar power and electric cars.
Trade War 2
But China already produces a third of the world’s manufactured goods, more than the US, Germany, Japan and South Korea combined, says Keith Bradsher in The New York Times. Relative to global GDP, the country’s surpluses in manufactured goods are now roughly twice as big as the biggest surpluses achieved by Japan in the 1980s. Governments worldwide are increasingly frustrated with the flood of cheap steel, cars, consumer electronics and solar panels, which put their own industries at risk. The EU and India are mulling tariffs; the Biden White House has only tightened Trumpera trade restrictions. Trade officials argue restrictions are justified because China’s cheap state bank loans, land grants and subsidised electricity give unfair advantages.
With trade quarrels spilling onto the diplomatic agenda, the discount applied to Chinese shares in the past few years is unlikely to completely reverse, says Thomas Mathews of Capital Economics. At its 2021 peak, the MSCI China index was trading at roughly 18 times forward earnings, compared with about nine times now. Valuations on Hong Kong’s Hang Seng are still barely higher than the trough reached at the nadir of the financial crisis. But while long-term pressures continue to mount, with the tailwind of state support and low valuations this rally should keep running, and Chinese shares “could continue to do well over the next year or two”.