China’s foreign investors hope stimulus will end ‘deep winter’

China’s stimulus package, unveiled around the holiday marking the 75th anniversary of the People’s Republic, was hailed as a gift by ecstatic domestic investors. Now foreign investors must decide whether to join the party.

The package, which targeted the country’s depressed stock and property markets, helped push the benchmark stock index up 24 percent in a week. Hong Kong’s Hang Seng index rose nearly 7 percent on Wednesday morning, while markets in mainland China were closed for the week.

However, many foreign investors want to see whether the package will be supported by high tax expenses as they decide whether to upgrade underweight positions. Meanwhile, private equity and foreign direct investors want reforms to address the core problems of China’s economy, such as how to boost domestic consumption and reduce deflationary pressures.

“Is this time different? We’ve seen these fits and starts where China implements some kind of stimulus and it hasn’t led to a constructive long-term recovery,” said Saira Malik, chief investment officer at US asset manager Nuveen, which owns assets worth 1.3 billion dollars. management.

“This time it still seems to us that its impact is greater for the stock market than for the economy. Before we become more structurally optimistic, we would look for more follow-through on a recovery in economic activity.”

Last week “was a clear turning point for China’s A-share market. . . investor confidence has been significantly restored,” said Thomas Fang, head of global China markets at UBS, referring to shares listed in mainland China. He added that “follow-up measures” would be essential to persuade foreign investors to change their minds in the long term.

The stimulus measures include unprecedented direct support from the central bank for institutional investors to buy shares and for companies to carry out share buybacks. The government has also cut benchmark interest rates and mortgage rates.

The Politburo of the Communist Party, led by President Xi Jinping, strongly supported fiscal support for the economy, while Chief of Staff Li Qiang repeated the message on Sunday. This reinforced expectations that fiscal spending will follow monetary easing, although the details have not yet been made public.

Before the rally, many foreign fund managers were underweight China. A monthly survey of global fund managers by Bank of America showed that in September, going short or negative on Chinese stocks was the second busiest trade in the world, after buying so-called technology stocks Magnificent Seven, which determined the US. markets have hit record highs this year.

Before the stimulus-related easing, which increased turnover in China’s stock market by about five times, the foreign share of trading volume was about 10-15 percent, UBS’s Fang said.

“We anticipate that (global) funds will have to restore their Chinese investments to a more rational level,” said Yu Chen Jun, deputy chief investment officer for equities at Value Partners.

The KraneShares CSI China Internet ETF, the largest U.S.-listed China-focused exchange-traded fund by assets, reported net inflows of $408 million last week, the most since June 2022.

“When Xi Jinping gets involved, you know the response is unlimited support” for the stock market, said Beeneet Kothari, founder of Tekne Capital Management, which invests about $1 billion in technology companies outside the U.S., more than half of which is located in China.

“Then you get higher share prices, which creates more benefits at (the) CEO level, which leads to higher spending and downstream effects,” Kothari said, adding that the fund has “aggressively” increased its positioning in China in the first half of the year. 2024.

Investors pulled $4.2 billion from U.S., Hong Kong and Taiwan-domiciled equity ETFs and mutual funds from the start of 2024 through the end of August, according to data from Morningstar Direct.

Michael Metcalfe, head of macro strategy at State Street, said the flows last Tuesday and Wednesday represented the strongest two-day run the bank had seen since post-Covid China reopened in January 2023.

State Street’s role as a custodian bank provides it with oversight of asset flows. Investors are still underweight Chinese stocks and are only gradually reducing it. “It depends on investors’ time frame, but if six months from now, there is more evidence that policy changes are heady, investors will be encouraged to reduce their underweight (position) more,” Metcalfe said.

Others warned that the Chinese market faces external risks, such as the possible re-election of Donald Trump, who has promised to raise tariffs on Chinese goods.

“The difficulty is risking China in the US election where Trump trades could backfire,” Dirk Willer, Citi’s global head of macro research, wrote in a note to clients on Friday.

Still, it was positive that China was trying to stimulate the economy while the U.S. was doing the same with interest rate cuts, said George Gatch, chief executive of JPMorgan Asset Management. “It’s probably a positive thing for global demand and markets,” he said.

Outside of listed stocks, foreign investor sentiment is mixed, particularly among private equity and venture capital firms, which have been hit hardest by the China crisis.

“It’s a very deep winter out there right now,” said Ed Grefenstette, chief executive of the Pittsburgh-based trust The Dietrich Foundation, which invests in private-market funds.

He estimated that 40-80 percent of China’s venture capital groups may not raise a new fund, which he said would be a “tremendous restructuring of the system.”

But Yup Kim, chief investment officer of the Municipal Retirement System of Texas, said: “Until 2020, we were a very strong China bull. In the short term, it’s very difficult to say, but I think in the next 10 to 15 years there will be a lot of equity value created in Chinese companies.”

Kevin Lu, a partner at Swiss private equity firm Partners Group, said his company is “very seriously considering” setting up a local renminbi-denominated onshore fund.

For institutional investors, the boost in confidence will need to be followed by more targeted fiscal measures, particularly to boost households suffering from low property prices, wage cuts and a weak labor market.

“We’re just starting to see urgency from the authorities there,” said Guy Miller, chief market strategist and economist at Zurich Insurance.

Foreign executives in China are also circumspect. Julian Fisher, chairman of the British Chambers of Commerce in China, said that while “any measures to stabilize the economy and boost domestic consumption” were welcome, “it is far too early to say” whether this would benefit British business . He pointed to Beijing’s slow progress on market access issues for foreign investors.

Jens Eskelund, president of the EU Chamber of Commerce in China, said strong stimulus signals were positive, but fundamental reforms to rebalance China’s economy against domestic demand were still missing. “We don’t see anything to indicate that China is moving away from this kind of investment-led, state-led, export-oriented economy.”

Ultimately, said Archie Hart, co-portfolio manager of emerging market equity portfolios at Ninety One, “if this is the last political statement for a while, then the euphoria will wear off pretty quickly.”

Reporting by Joe Leahy in Beijing, Arjun Neil Alim in Hong Kong, Kaye Wiggins in Singapore, Jennifer Hughes and Sun Yu in New York, Ian Smith and Alan Livsey in London and Ilya Gridneff in Toronto