The bounce in Chinese stocks on Wednesday amid expectations policy makers will do what it takes to offset the hit from lockdowns related to its zero-Covid policy is unlikely to be sustainable unless Beijing rolls out the big-bang type of stimulus it has been reticent to implement—and even then it could take time to steady the economy.
Economists were wary about China’s ambitious 5.5% economic growth target even before Shanghai and other cities have been locked down and the economic backdrop has only deteriorated with the lockdowns.
But on Wednesday The Wall Street Journal reported that President Xi Jinping has directed officials to make sure China’s economic growth outpaces the US, even as it deals with lockdowns. On the table are plans to speed up big construction projects and issue coupons to spur consumer spending, according to the report.
Talk of stimulus tends to cheer markets. The iShares MSCI China exchange-traded fund (MCHI) rose nearly 4% to $48.21 and the iShares MSCI China A ETF (CNYA), which is invested in domestically-listed shares, gained 4.7% to $32.80 on Wednesday.
But it may still be premature. Chinese officials have intensified efforts to reassure investors that help is on the way, their crackdown on the technology sector could be winding down and they are trying to seek some compromise with US regulators to avoid the delistings that have loomed over US-listed Chinese stocks.
And analysts note a marked change in policymakers’ views toward stimulus and now expect another rate cut, stepped up infrastructure spending and a relaxation on restrictions on the property sector. But some worry it may still not be enough, especially given the lost income and battered confidence created by the lockdowns.
“Unless the government does the direct fiscal transfers like the US did in 2020—of enormous proportions—to offset loss of income in places like Shanghai, consumer spending is going to be very weak and disappointing,” says BCA Research’s Chief Strategist Arthur Budaghyan, adding that China has never done the type of fiscal transfer that he thinks is needed to deal with the economic challenges.
The other problem: Since 2009, China hasn’t had an economic recovery without a strong property market. If lockdowns begin to ease and stimulus collides with pent-up demand to boost property sales, Gavekal Dragonomics analysts say it could spark a rally in onshore stocks.
Beijing’s crackdown on the property sector and its longer-term goal of reducing debt and speculation in property could also keep potential buyers skittish—and that doesn’t bode well for a sustainable recovery soon.
Stimulus efforts may also be too late for a recovery this year, says TS Lombard’s head of macro research Freya Beamish. The economic cycle typically doesn’t turn until liquidity growth turns—and then only with a lag of about three quarters. Though officials are increasing infrastructure spending aggressively, Beamish says that won’t feed into nominal GDP growth until around the end of the year.
“Infrastructure spending only prevents a worse outturn in growth, as lockdowns continue and real incomes are squeezed. China will be lucky to avoid its version of a recession this year, which we define as something similar to what happened in 2015, but this time around the stakes are higher because the property market model is broken,” says Beamish. doesn’t recover, the economy may just stabilize rather than recover itself. “Stimulus may be necessary but it isn’t going to be sufficient to put the bottom in Chinese stocks. It may be a ‘show the money type thing’ and a property market recovery is needed,” BCA’s Budaghyan says.
Lockdowns that are set to lift in a couple of weeks could offer battered Chinese stocks a reprieve but investors may need more indications the economy can heal—and geopolitical tensions aren’t worsening—before diving in.
Write to Reshma Kapadia at [email protected]
Credit: www.marketwatch.com /