Flash Is the rally on China equities sustainable?

Summary

• China equities cheered on Beijing’s pledge to stabilise financial markets and economic growth in a clear and coordinated approach.
• No doubt the State Council policy statement has provided the much needed relief to the fragile China asset market.
• We see very good re-rating opportunities in Chinese equities and selected China credit over the course of the year should all these positive policy signals translate into implementation of specific measures and effectively revive financial conditions as well investor, consumer and corporate confidence.

China equities melt up

China equities have been on fire since the afternoon (Asian time) of 16 March 2022, cheering on Beijing’s pledge to support financial markets and economic growth after panic/forced (by margin calls) sell-off that resulted in “capitulation” by foreign investors at the beginning of the week. Chinese authorities took a clear and coordinated approach this time with announcements by four other government departments followed by the State Council’s policy statement.

What are the major investor concerns & what have Chinese authorities pledged to address?

1. Concern: The renewed Covid outbreak and the latest lockdowns/mobility restrictions in major China cities including Shenzhen (the tech hub), Guangdong and Shanghai (collectively accounts for nearly ¼ of China GDP and 40% of exports) present risks to global supply chains and China’s 5.5% GDP growth target.
   Response: The government is looking to effectively boost the economy in 1Q with more proactive monetary policy and maintain moderate growth in new loans.
2. Concern: Heightened geopolitical tensions and the potential spillover impact on Chinese companies
   Response: China's Ambassador to the US had penned a Washington Post op-ed  to clarify China’s stance on Russia and Ukraine.
3. Concern: The de-listing risk of US-listed Chinese ADRs (investors’ reaction looked overdone as this issue has been here for more than two years with many of the Chinese ADRs already secondary listed in Hong Kong and more will likely to do so). Response: China-US are holding audit talks with positive progress and detailed collaboration being worked on. The government remains supportive of Chinese companies to list overseas.  Also, regulators in the Mainland will step up their communication and coordination with Hong Kong regulators on financial market stability. Furthermore, the authorities encourage listed companies to step up share buybacks and guide fund management companies to purchase shares to prop up prices.
4. Concern: Regulation uncertainty persists without any meaningful loosening and even tightened further in some areas
   Response: The regulatory environment needs to be transparent and predictable. Regulators will steadily push forward and complete rectifications of large platform companies as soon as possible and improve their global competitiveness (indicating the regulatory actions on large tech companies will be completed soon?). Government agencies should coordinate with financial regulators in advance on policies with substantial impact on capital market, actively launch market-supportive policies and be cautious when it comes to tightening measures.
5. Concern: The property market has not shown any signs of revival despite some policy relaxation
   Response: The government will take timely, forceful and effective measures to prevent and resolve risks in the property sector and propose supporting measures for the transition to a new development model. The Ministry of Finance also said to put property tax trial on hold this year to ease market jitters.

Chinese tech stocks recorded the strongest rallies ever with the Hang Seng Tech Index up 30% from Tuesday record low (as of writing). We believe the flows were dominated by short covering given the high short interest on China tech stocks. With such a strong rebound in China equities already, the next question is whether the rally is sustainable. 

What are the criteria for the rally to become more sustainable?

• Easing in full force with significant loosening in monetary policies, including further RRR and key rate cuts as well as large liquidity injection, and implementation of fiscal stimulus that have already announced or even increase fiscal spending further.
• US-China regulators reach an agreement on cross-border auditing regulations and revival of IPOs in the offshore markets.
• Confirmed wrap up of regulations on the tech sectors or even authorities actively launch market-friendly policies, which will lead to the decline in risk premium for the China market.
• The property sector is still suffering from the lack of refinancing channel. Much stronger support and funding access for the property sector is needed.
• More relaxation or even a clearer exit strategy from the “dynamic zero” Covid policy.
• Better signs of improved coordination among different government agencies for policy implementation.
• De-escalation of geopolitical tensions.

CONCLUSION / STRATEGY

• No doubt the State Council policy statement has provided the much needed relief to a fragile China asset market.
• We see very good re-rating opportunities in Chinese equities and selected China credit over the course of the year should all these positive policy signals translate into launch and implementation of specific measures and effectively revive financial conditions as well investor, consumer and corporate confidence.