China Stocks: The Fun is Just Getting Started
China Stocks: The Fun is Just Getting Started
China's CSI 300 index had its best week in 26 years. More fun is on the way.
Last month, China’s CSI 300 Index skyrocketed higher by 23% after the country unveiled its most aggressive stimulus measures since 2020. The index surged higher by 16% for the week ending September 29, its best week in 26 years.
Appaloosa’s David Tepper amplified the rally after making a rare public appearance on CNBC’s Squawk Box. When asked what he was buying in China, he responded “Everything.”
“This is incredible stuff for that place, okay? So, it’s everything. Now, I would love to see a pullback. My newfound limit, which might have been twice my oldfound limit — I’m not gonna say what it is — I will have another new-found limit in a pullback if I see these [stimulus measures] absolutely be implemented. Because you can look at these names and you’re talking about single-digit P/E multiples with double-digit growth.
-David Tepper, September 26, 2024
Tepper added that he increased his allocation to China following the Fed rate cut and China’s reserve requirement ratio (RRR) cut. BABA was his largest Q2 13F position, followed by stakes in other Chinese stocks like PDD, FXI, KWEB, and JD.
Trading in China was resumed on Oct. 8 following the week-long closure for China’s Golden Week holiday. After a large gap up at the open, the CSI 300 has since plunged by 12.7%. It’s down by 3.3% compared to its September 30 close.
Is the rally over? Or is the fun just getting started?
Let’s first take a look at the stimulus announcements from the People’s Bank of China’s (PBOC).
China’s Stimulus Announcements
PBOC Governor Pan Gongsheng provided the spark to ignite the rally after announcing that the RRR for banks would drop by 50 bps with the possibility of an additional 25 to 50 bps reduction by the end of the year.
With a lower RRR, banks will be able to provide more favorable interest rates. In other words, borrowing costs are lowered in order to increase liquidity and demand within the country.
Tepper provided an interesting observation in response to Gongsheng’s language while he was announcing the RRR reduction:
“You know, he came out and he was like jovial. It's like, whoa, jovial, saying, "We're going to cut, and we're going to, and we'll give you more." And he said, "We'll do more and more if needed." Now, the Chinese to say, "We'll do more and more if needed," they don't say that because it's not been healthy to say those sort of things in China. But they said that the other night. And I listen very carefully to what government officials say. So I took it that they did a lot. They exceeded expectations. And he promised to do more and more and more. Okay. And that's very strange language, especially for, you know, any central banker, but especially over there.
-David Tepper, September 26, 2024
Importantly, measures to boost the stock market were introduced, like providing easier borrowing access to funds, insurers and brokers for stock purchases. In addition, banks that provide capital to publicly traded companies interested in buying back their own shares will be eligible to receive cheap loans to fund the buybacks. Yes, you read that right. The PBOC is basically encouraging stock purchases and buybacks.
The PBOC also announced mortgage rate reductions for existing home loans and a reduction of the minimum down payment requirement for second homes in an attempt to support the housing market.
More stimulus announcements are on the way. On Saturday local time, China's finance ministry will hold a meeting to announce the latest policies. Economists are forecasting between two and three trillion yuan of fiscal stimulus, or between $283 and $484 billion.
Investors in China and Hong Kong Rush to Buy Stocks
Chinese and Hong Kong investors have taken notice of these announcements. In fact, demand for opening new brokerage accounts at the beginning of October was so high that it resulted in several system outages. This led to a heavy increase in foot traffic for the brokers with brick-and-mortar locations.
“Nasdaq-listed Futu, one of the biggest online brokers in the city, said account opening inquiries last week were 40 per cent higher than normal, with both its online platform and physical stores witnessing strong interest from investors.
Stock trading volume via Futu’s online platform last week jumped 95 per cent from a week earlier, while the number of investors rose 60 per cent, according to a spokeswoman.”
-SCMP, October 1, 2024
That’s reminiscent to the meme stock frenzy of 2020 and 2021 that saw valuations across the board soar. The difference is that the S&P 500 was near all-time highs back then while Chinese stocks were in a downtrend for three years prior to September.
Funny enough, China even seems to have its own version of Roaring Kitty in the form of Shanghai Uncle, a social media personality who has amassed billions of likes on Chinese social media for his wild market predictions.
For the seven days ended October 9, Chinese equities witnessed $39 billion of inflows. $30 billion of that was from domestic investors, a record high. The remaining $9 billion was from foreign investors, also a record high.
Unlike the U.S., real estate accounts for the majority of the average Chinese household’s wealth, estimated to be between 70% and 80%. In the U.S., real estate makes up between 25% and 35% of household wealth.
Unfortunately, China’s housing prices have also collapsed during the past three years.
Faith in the housing market has taken a plunge as prices are now back to 2016 levels, depressing wealth and sentiment simultaneously. Any effects from the recent housing stimulus will be incurred with a lag. That’s much different than the quick reaction time of the stock market.
With a falling housing market, unfavorable savings rates on deposits, promises from the PBOC to support the market, and a historic surge in stocks, it isn’t exactly surprising to see that interest in stocks has ballooned in China. That’s a huge plus from a country with 1.4 billion people, equivalent to 17.39% of the global population. The Chinese population have historically had a low allocation to stocks and one of the highest savings rates in the world.
Is the Rally Sustainable?
Chinese stocks took a breather this week after China’s anticipated National Development and Reform Commission (NDRC) meeting failed to yield any concrete developments on further stimulus.
Stanley Druckenmiller is one of the investors who still has their doubts. At a conference last month, he noted that “As long as Xi Jinping is running China, I have no interest.”
One caveat to investing in China is that their economic numbers still look shaky. For starters, consumer confidence is still near all-time lows while deflation remains an issue. Furthermore, September’s Caixin PMI (Purchasing Managers’ Index) survey, an indicator of private manufacturing and services, tallied in at 49.3 compared to the estimate for 50.5. It was the lowest reading since July 2023. A reading above 50 indicates growth while a reading below 50 indicates contraction.
At the same time, the market tends to bottom before the economic data does. At least in the U.S.
“Looking at recessions dating back to 1957, on average, the S&P 500 bottoms three months after a recession begins but 10 months before the recession ends. Excluding the 2001 recession, all market bottoms since 1957 occurred before the recession or while the recession was still occurring.”
—J.P. Morgan
The big question for China is if its stimulus can prop up the economy while restoring consumer confidence and demand. China’s government has made it clear that they are ready to provide the support to make this happen. An uptick in stock market participation suggests that citizens are increasingly embracing this perspective.
The Fun in Chinese Stocks is Just Getting Started
It has been a difficult three years for the world’s second largest economy. During that time, the CCP has transitioned from a strict regulator to a more pragmatic and data-driven entity given the economic turmoil. That didn’t come without a series of mistakes, such as restricting large tech firms and implementing an extremely harsh zero-COVID policy that stifled growth.
Both institutional and retail investors within the U.S. remain hesitant on China. In September, shorting China equities was the second most crowded trade, second to going long on the Magnificent 7, according to Bank of America’s global fund manager survey.
That suggests that there is still plenty of upside left.
China’s total market cap divided by its GDP, or the Buffett Indicator, is just below 60%, making it the third lowest among the top 10 largest economies in the world. The country’s State Council has set a goal of “around 5%” GDP growth this year, which was reiterated at the NDRC meeting. For context, the U.S. expects a 2.7% increase in GDP while Germany expects 0.3% growth. Japan has forecasted 0.9% growth.
With a government seeking to increase consumption and a vast population starting to come around on stocks, China looks ready to begin its long-awaited comeback. After all, it is the year of the dragon.
Disclosure: I have a 9.2% portfolio allocation in Alibaba (BABA)
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