Experts question the sustainability of China’s stock market rally

Chinese stocks have exploded higher as the government unveiled economic stimulus measures over the past week.

The market saw record trading volume, with the benchmark CSI 300 soaring 25% since September 23 to 4,018. To be sure, this is still more than 30% below the February 2021 record.

Among popular US-listed Chinese stocks, Alibaba (crone) the world’s largest e-commerce company, is up 25% since September 23. And Yum China, (YUMC) the largest restaurant chain in the country, climbed 30%.

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In terms of the bazooka-style stimulus, the central bank announced a series of interest rate cuts, reduced bank reserve requirements and a program to fund stock purchases by institutional investors. In addition, the government pledged to increase spending, although it was tight-lipped on details.

China stocks have rallied in the past week, but will the rise continue?

Jie Zhao/Getty Images

On the housing front, the latest jump came after three of China’s biggest cities eased home-buying regulations and the central bank moved to lower mortgage rates. Residential real estate is a key — and struggling — industry for the nation of 1.4 billion.

China’s stock market has fallen over the past three years as the economy has weakened.

China’s economic growth is slow

GDP grew by an annual 4.7% in the second quarter, the weakest in more than a year and below the government’s target of 5%. (Experts say China’s government is likely exaggerating the growth numbers in any case.)

Stronger economic expansion could be a boon for the stock market, boosting corporate earnings. Many investors in China have stuttered with optimism following the government’s moves.

“It’s really a big change; the policies are so intense. We’ve never seen such clear instructions to stop house prices falling and support the stock market,” Dickie Wong, executive director of research at Kingston Securities.

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“Many foreign investors are afraid of missing out. Local retail investors ask me what they should add. Institutional investors are rushing into the market to catch up.”

Even US stocks got a boost last week from China news.

But not everyone is losing their minds over the government stimulus package. China has also announced similar moves without much impact.

Until the housing market recovers and middle-class consumers have enough income and confidence to spend, the economy will remain stalled, many experts say.

The veteran fund manager is skeptical of China’s rally

Count TheStreet Pro columnist Ed Ponsi, managing director of Barchetta Capital Management, as one of the skeptics.

“While everyone else is dancing, I hate to be the guy in the corner with a thought bubble saying, ‘I don’t know that none of this is real,'” he wrote.

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“That’s the problem. It’s not real. The Chinese bazooka is nothing but smoke and mirrors. With its decision to prop up the stock market using government funds, China has taken a literal joke – ‘dive protection team’ – and made it a reality.”

The Plunge Protection Team was a nickname for the US Financial Markets Task Force. It was established in 1988 to provide advice to the US President during times of market stress.

Experts have doubts about the incentives

There are already signs that China’s stimulus plan is wearing thin, Ponsi said. China is the largest consumer of copper in the world, with 57%. However, after a three-week rally, copper fell 2% on Thursday.

It’s bad news for China, he said. “We can look to this industrial metal for clues about the health of China as well as the health of the global economy.”

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And others have their doubts. “Amidst all the euphoria, the structural problems are still there” for the economy, Rory Green, chief China economist at GlobalData TS Lombard, told The Wall Street Journal.

Memories of previous government failures to stimulate the economy are fresh in the minds of many pundits. “My concern about a potential resumption of the previous disappointing cycle remains,” IG Markets analyst Hebe Chen told Bloomberg.

“It’s still too early to tell if this week’s gold rush will blossom into a real gold rush or fizzle out into another mirage.”

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