Optimism in China is growing. Why some investors are cautious

BEIJING — China’s latest policy signals are having a bigger impact on sentiment than addressing deeper issues such as real estate, analysts said.

The Shanghai Composite rallied to close at a three-month high on Thursday after state media reported that Chinese President Xi Jinping had chaired a Politburo meeting on the economy that morning.

The unexpected high-level meeting called for halting the housing market decline and strengthening fiscal and monetary policy. He offered few details while confirming the central bank’s rate cuts announced earlier in the week.

Markets should appreciate how Beijing recognizes the severity of the economic situation and how its piecemeal approach so far has not worked, Ting Lu, chief China economist at Nomura, said in a report on Friday.

“The ‘shock and awe’ strategy could be intended to stimulate markets and boost confidence,” Lu said, but ultimately it is still necessary to introduce well-thought-out policies to address many of the “deep-rooted problems.”

Growth in the world’s second-largest economy has slowed, dragged down by the housing crisis. Retail sales rose barely more than 2 percent in recent months, and industrial profits barely rose in the first eight months of the year. Exports are one of the few bright spots.

Nomura’s Lu said policymakers especially need to stabilize property as it is in its fourth year of contraction. He estimated that the impact of additional incentives would not exceed 3 percent of China’s annual GDP.

“Markets should put more emphasis on the specifics of the stimulus,” Lu said. “If not designed well, a hasty stimulus program, even if seemingly large, could have a slow and limited impact on growth.”

The People’s Bank of China cut key interest rates this week and announced plans to cut rates for existing mortgage holders. The Finance Ministry has yet to publish any major policies, despite reports of such plans.

For some investment institutions, this is still not enough to move the needle on their outlook for China.

“China’s policy of lowering interest rates has not helped improve the confidence of consumers who are wary of borrowing in the first place,” Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, said in an email.

“We would sell emerging market stocks right now,” he said, “as we have little faith in Beijing’s willingness to extend the big stimulus that is needed.”

Christopher added that “Thursday’s announcement of future fiscal stimulus is welcome, but it remains to be seen whether China’s government is willing to take the necessary steps to reverse the psychological damage to the sentiment of private households and businesses.”

In recent years, the Chinese government has cracked down on real estate developers, after-school tutoring companies and the gambling industry. Since then, policymakers have eased their stance, but business and consumer confidence has yet to return.

China’s latest interest rate cuts follow the US Federal Reserve’s move to easier monetary policy last week. In theory, cutting US interest rates gives China’s central bank more room to cut already low domestic rates.

A September survey of more than 1,200 Chinese companies by the US-based China Beige Book found that corporate borrowing has fallen despite historic lows in the cost of doing so.

“One can certainly hope for a wealth effect from stocks and property, but stocks will be temporary and the decline in wealth from property is overwhelming compared to any help,” Shehzad Qazi, chief operating officer at China Beige Book, a US research . firm, it said in a note on Thursday.

He expects retail sales could pick up slightly over the next four to six months.

Qazi also expects the recent rally in Chinese stocks to continue into the final three months of the year. But he warned that the policies announced this week to attract more capital to the stock market “are not yet operational, and some may never be.”

Those warnings haven’t deterred investors from piling into slumping Chinese stocks. The CSI 300 stock index rose on Friday, on pace for its best week since 2008. It could rise another 10 percent in the near term, Laura Wang, chief China equity strategist at Morgan Stanley, told Street Signs Asia ” from CNBC.

The change in sentiment has spread globally.

“I thought what the Fed did last week was going to lead to China easing, and I didn’t know they were going to bring out the big guns like they did,” US billionaire hedge fund founder David Tepper told Squawk Box on CNBC. Thursday. “And I think that’s a whole change.”

Tepper said he bought more Chinese stocks this week.

An important takeaway from Thursday’s high-level government meeting was support for capital markets, in contrast to a more negative perception in China of the financial industry in recent years, said Bruce Liu, CEO of Esoterica Capital, an asset manager. .

“We hope this meeting will correct this misperception,” he said. “For China to continue to grow in a healthy way, (they) really need a well-functioning capital market.”

“I don’t think they sent different messages,” Liu said. “It’s just that (that) they point it out with detailed action plans. That made the difference.”

— CNBC’s Sonia Heng contributed to this report.