Foreign investors applaud China’s incentives

By Ankur Banerjee and Laura Matthews

SINGAPORE/NEW YORK (Reuters) – As market euphoria is China’s biggest boost since the pandemic ended, foreign investors are now wondering whether the $114 billion toolkit will provide the spark needed to turn a stock market weakened

Chinese stocks lagged major markets throughout the year despite a series of piecemeal measures taken by authorities to revive the anemic economy and boost share prices.

This week’s measures have been comprehensive. The package of rate cuts and, importantly for markets, an 800 billion yuan ($114 billion) facility to finance share buybacks showed Beijing’s new urgency to heal its second-biggest deflationary world economy and a struggling real estate market.

Chinese shares rose, with the blue chip CSI300 erasing losses for the year and poised for its strongest weekly performance since 2022. The yuan climbed to a 16-month high against the US dollar.

On Thursday, Chinese leaders pledged to support the ailing economy with “forced” interest rate cuts and fiscal and monetary policy adjustments, adding more fuel to the rally.

Investors said the reaction showed how depressed sentiment was, but the measures did not address what most overseas investors want to see fixed: fiscal measures that directly boost consumer demand.

The package was mainly about “injecting liquidity into the markets, but we are at a point where more liquidity alone will not deliver the sustained long-term recovery that investors want to see,” said Phillip Wool, head of portfolio management . at Rayliant Global Advisors.

“As long as demand remains as weak as it has been, nobody will want to borrow and measures like these will not have the desired impact,” Wool said.

Chinese stocks have stuttered in recent years even as markets elsewhere hit record highs, prompting investors to pull back and stay away, with more than a quarter of global funds tracked by Copley Fund Research holding no exposure to China at all . Almost all funds retained exposure to China in 2021.

While Hong Kong’s CSI300 and Hang Seng have risen over the past two days, they remain down 40% from their February 2021 peaks. In comparison, Japan’s Nikkei is up 24% and the S&P 500 is up 45% in the same period.

For Gary Tan, portfolio manager at Allspring Global Investments, this week’s measures are unlikely to prompt him to change his underweight position on China.

“We believe it will take a fundamental change in the outlook for China’s deflation and housing market for investors to commit new funds to China,” Tan said.

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Vivian Lin Thurston, portfolio manager for William Blair’s emerging market growth strategy, is currently underweight China and largely unaffected by the new measures.

However, Thurston said her fund could add to certain stocks that have improved fundamentals and are less affected by the economic environment.

CHEAP STOCKS

The success of some of these measures, including those targeting capital markets, will depend on whether institutional investors feel comfortable returning to equities.

China risks missing its economic growth target of about 5 percent this year due to falling property and fragile consumption, which analysts say can only be fixed by fiscal policies that put money in consumers’ pockets.

“Significant and effective fiscal stimulus needs to emerge to effectively address these key challenges to the economy,” William Blair’s Thurston said.

Certainly some investors, such as Jonathan Pines, head of Asia ex-Japan at Federated Hermes and Rayliant’s Wool, are attracted by the valuations.

The benchmark Shanghai trades at a price-to-earnings ratio, a commonly used valuation measure, of 12, while the Nikkei trades at 21 and the S&P 500 at 27.

In particular, Bob Zhang, managing partner of Beijing-based Pine Street Capital, likes stocks focused on AI computing power, semiconductors and software-as-a-service, which he sees as cheap and benefiting from global technology developments.

Investors are also pointing to the fact that China is lifting stops at the same time that the US Federal Reserve has started to cut rates.

“If the United States continues to cut interest rates as expected and China continues its policy easing, I think the market will form positive feedback and continue to rise,” said Zhang of Pine Street Capital.

(1 USD = 7.0165 Chinese Yuan)

(Reporting by Ankur Banerjee and Rae Wee in Singapore, Summer Zhen in Hong Kong, Laura Matthews and Carolina Mandl in New York; Editing by Vidya Ranganathan and Sam Holmes)