This article first appeared in Wealth, The Edge Malaysia Weekly on October 28, 2024 - November 3, 2024

For at least three years, China and Hong Kong’s stock markets were in the red. But thanks to the “bazooka stimulus”, the large economic stimulus package announced by the Chinese government in late September, things started to turn around. Share prices soared and sentiment improved.

The big question now is whether the rally still has legs.

While sentiment has picked up, most investors remain on the side of caution, believing that whether or not the rally still has legs will depend very much on what the Chinese government will do in the coming months to boost economic growth.

One of the first things to watch out for is the outcome of the meeting of the National People’s Congress (NPC) Standing Committee on Oct 24, according to fund managers.

George Maris, chief investment officer and global head of equities at Principal Asset Management, has been bearish on China equities for many years, but that view has changed dramatically since late last year.

“I’ve gone from years of being substantially under-allocated on China [equities] to very aggressively shifting funds into the market by the end of last year,” he says.

Last year, Maris started to observe more coordinated efforts by the government to stimulate economic growth and improve investor returns, while public listed companies started to focus more on rewarding shareholders.

For instance, a well-known China company with a dominant market position had been buying assets across the world with very little strategic value. But then it started selling these businesses recently and rewarded shareholders through share buybacks. The company also instituted a dividend policy and increased its dividend payouts.

Its investors saw a 10% return in that particular year as a result. All this while the firm sat on a healthy balance sheet and huge cash pile, with its profitability remaining strong and growing. Its share price, however, was declining. It is examples like this that Maris saw as opportunities in the China market.

The stimulus package announced by the Chinese government reinforced Maris’ constructive view on the China market. But not everyone thinks the same. Many reckon that September’s stimulus package was insufficient to address China’s economic challenges, with some estimating the appropriate size at RMB10 trillion (US$1.4 billion or RM6.1 billion). The announcement also did not provide enough details on how that money would be disbursed.

Maris, though, believes the Chinese government will take the necessary steps to stimulate growth. The stimulus package announced by various key agencies shows its determination to tackle the economic woes the country has been facing for years.

Does China need a RMB10 trillion stimulus package to bring its economy back on track? Maris says there isn’t a magic number for this. It is the determination of the government and the signals it has sent that count.

“Every time an announcement is made, the market says it’s not enough. For instance, the Ministry of Finance (MoF) issued some powerful statements on Saturday (Oct 12) that it is going to increase [the government] debt [limit] and more. Yet the market came back and said the propoals weren’t specific enough, we need more. The fact is that every time the government made an announcement over the past year, the market said it’s not enough.

“We saw that during the global financial crisis, when the US Federal Reserve under Ben Bernanke instituted measure after measure to force liquidity into the market as the real estate and stock market collapsed. I recall managing US equities back then. Every time the Fed took action, the market similarly said the measures were not enough. And one day, it was enough. It was the same when [Mario] Draghi (former president of the European Central Bank) said the ECB will do ‘whatever it takes’ in 2012 to address the region’s sovereign debt crisis. One day, it was enough.”

Maris believes the stimulus package was significant, showing a coordinated effort by the Chinese government to change the country’s economic trajectory moving forward, and that the market is too hung up on near-term economic performance, such as whether China can achieve its 5% gross domestic product (GDP) growth this year.

To him, China’s growth rate this year isn’t key. “It’s not so much about precise figures. If the Chinese government addresses its structural issues, the market will see it through. Its people are going to feel optimistc as to the government’s resolve.”

He believes the government is providing a floor value to its real estate sector. And when the Chinese people have a better sense of the property market moving forward, they will start spending, reverse the country’s deflation trend and boost GDP growth. “In the portfolio I managed, I took a positive position in China equities about a year ago. And I’m not blinking,” Maris says.

Principal Asset Management has US$695 billion of assets under management (AUM) worldwide as at end-2023, according to its official website.

Just how important is the property market to China? According to The New China Playbook: Beyond Socialism and Capitalism, authored by Chinese economist Keyu Jin, property accounts for 60% of Chinese household assets, as opposed to 37% in Japan and 25% in the US.

Moreover, property is the most important form of collateral for Chinese companies seeking financing and a lifeline for local governments that derive a big chunk of fiscal revenue and debt financing from current and future land sales.

The book adds that property accounts for almost 30% of the nation’s GDP, by far the highest among large economies. The figure is 17% in the US, 15% in South Korea, and around 20% in the UK and France.

Victoria Mio, head of greater China equities and portfolio manager on the Asia ex-Japan equity team at Janus Henderson Investors, also holds a constructive view on the China stock market.

Mio, who joined Janus Henderson this year, says the cash level of the fund she manages has fallen from about 5% to 1% and the fund is positioned for an upward trend in the market.

She believes the China stock market is entering a phase where investors with differing views are largely adopting a wait-and-see approach.

“One camp believes that the stimulus package is sustainable and sizeable while the bearish camp thinks China is going to take a long time to solve its challenges and the stimulus may not be enough. We are still in this uncertain period,” she says.

However, Mio believes more details will be announced after Oct 24, when the stimulus package gets the approval of the NPC Standing Committee.

She likes that the package addresses the two biggest risks in the Chinese economy, which is local government debt and the property market slump. Measures include a large-scale debt swap programme that lets local governments replace their hidden debt, borrowed through companies and financing vehicles, with new official bonds with lower interest rates.

Mio says China’s MoF announced that the government still has RMB2.3 trillion available for use this year, not including the RMB400 billion additional government debt issuance. In total, RMB2.7 trillion can be deployed immediately in 2024. This has boosted investor confidence, she observes, adding that the Chinese government will continue to raise debt in the following years.

According to news reports, China may raise US$850 billion in new debt over the next few years to spur growth.

“No doubt, all this is going to improve China’s fourth-quarter GDP growth numbers and raise GDP expectations. We have already seen upgrades by brokers and economists. We expect to see more upgrades for this year and the next.”

Funds managed by Mio have invested in several companies in the internet, healthcare and consumer sectors over the long term. She and her team also dissected the stimulus package to find out which sectors would  benefit from it the most.

While Mio is underweight on the property sector, she nonetheless is selectively buying into high quality property companies that she believes will benefit from the lower mortgage rate and down payment. The government’s aim of buying up excess inventory in the property market will also spur demand in the sector.

“We still have an underweight position in the sector knowing that the government is trying to avoid risk from spreading further. We don’t expect cyclical growth to come back anytime soon.”

Mio selectively added more bets on specific consumer brands after the government announced its trade-in programme to encourage consumers to replace their old home appliances and automobiles with new ones by providing them with subsidies.

She also favours brokers as, for the first time, the government is putting emphasis on asset value by aiming to stabilise property prices and boost equity value. With investor interest returning, brokers and exchanges are expected to benefit from an increase in transaction volume.

Mio says insurance companies are also looking attractive, as the stimulus package is expected to provide RMB500 billion in swap facilities for qualified financial institutions, including insurance companies, to provide liquidity support to the China stock market. She says the increase in the share prices of the companies in the insurers’ portfolios will boost their earnings, moving forward.

“After the policy announcement made by the three regulators, namely PBOC (People’s Bank of China), CSRC (China Securities Regulatory Commission) and NFRA (National Financial Regulatory Administration), we made the judgement call that this is a 180-degree pivot [in China’s policy direction]. And we think that the direction of travel is correct. In terms of scale and timing of the stimulus, things will come in eventually to support growth.

“It is important for investors to have faith and hold on to the market for their investments,” says Mio. Janus Henderson had US$361.4 billion in AUM as at end-2023, according to its official website.

Generally, fund managers are treading cautiously. Yip Kah Ming, assistant portfolio manager at AHAM Capital, says the Chinese government needs to roll out more fiscal stimulus for the rally to sustain.

The stimulus package that was announced earlier, including lowering the policy rate and reserve requirement by 0.5%, isn’t enough to spur growth as credit demand remains weak due to a lack of confidence among businesses and consumers.

The impact of lowering the mortgage rate for existing home loans is also not substantial, as the measure will save about RM150 billion for 50 million households per year, which translates into only RMB250 per household per month, he adds.

“We believe the sustainability of the current rally hinges on whether the government will roll out more fiscal stimulus that the market deems sufficient to pull the economy out of its current deflationary loop.”

Yip says the Politburo meeting held in late September signalled a heightened sense of urgency from top leaders to stabilise the market and combat the macroeconomic slowdown. He expects more stimulus packages to be rolled out in the next few months by the Chinese government.

Yip also expects the central government to increase the fiscal transfer to local governments due to the latter’s poor financial health as a result of collapsing revenue from land sales amid a deep contraction in the property market. The Chinese government might also consider spending on social security, particularly targeting lower-income groups and encouraging childbirth. Further property stimulus measures might also be announced.

Yip says if all these materialise, they should help stabilise the Chinese economy and guide it out of its current deflationary loop. But he isn’t expecting a strong V-shaped recovery.

David Ng, deputy managing director and chief investment officer at AHAM Capital, says the firm has an overweight call on Southeast Asian countries due to their attractive valuations. It has a neutral stance on India, as its high long-term growth potential is offset by elevated valuations, and underweight South Korea, as the market is highly cyclical and most sectors are not aligned with the current economic cycle.

“Our position in China is to stay nimble due to market volatility stemming from policy announcements. We have shifted from an underweight to a neutral position, but remain cognisant of the headwinds that government initiatives must overcome. Although global investors are underweight in China, we are giving it (China) the benefit of doubt as it has reached a pivotal moment,” he says.

Edith Qian, equity strategist at CGS International Securities Hong Kong Ltd, says the size of the recently introduced policy package is larger than the firm’s previous expectations, but should not be considered a “bazooka”. The policy pivot will improve China’s growth outlook, but its government still needs to address structural issues through both large-scale fiscal policies and structural reforms.

“We believe more fiscal policies will be rolled out by the Chinese policymakers and hence the current rally still has legs,” she notes.

From a valuation perspective, global investors have been significantly underweighting the China market, Qian adds. Even after the recent market rally, its valuation is still around the median level of its five-year historical range.

“Compare China with other emerging markets; there is still a visible valuation gap. We believe the market momentum will probably last for a while before the valuation becomes quite stretched. For investors who are still on the sidelines, I think it’s not too late to enter the market,” says Qian.

Nicholas Chui, portfolio manager at Franklin Templeton Emerging Markets Equity, agrees with the view that the rally will be sustainable if investors can see further policy support and recovery in fundamental data in the broader economy across multiple sectors.

“The government’s intention is to stem the decline in the property market. However, we must remember that this will need time to heal [market] confidence and subsequently translate into a recovery in [economic] numbers,” he says.

“We expect further policies to be rolled out. The government is likely in a wait-and-see mood, where broader and more detailed policy support would likely be forthcoming if data continues to look bad.”

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