On Monday (14 March), we had the worst sell-off in China stocks since the 2008 Financial Crisis.
Fear of US sanctions led to indiscriminate selling, with names like Tencent and Alibaba down 10%.
On Wednesday (16 March), Vice Premier Liu He, the country’s top economic official decided enough was enough.
He released a policy statement that said that the government should “actively introduce policies that benefit markets”.
Stocks roared back.
Nasdaq Golden Dragon China Index jumped by 33% Wednesday.
Tech giants Alibaba and Tencent surged 37% and 23%, respectively in one day.
By Thursday (17 March), Chinese stocks had had their biggest two-day advance since 1998.
So… Is this the bottom for China stocks?
What exactly did Liu He (or the Chinese Financial Stability and Development Committee) say?
Otherwise, I’ve provided a simple summary below:
- Overseas listing is ok – Chinese government “supports all types of enterprises to go public outside China”
- Better communication on policy crackdowns – Any policy with “significant impact on capital markets” should be better communicated in advance, to maintain stability and consistency of policy expectations
- More cautious on contractionary policies – New policies will continue to be introduced, but to be more cautious in bringing in contractionary policies
- Long term goal is still economic growth – But stable development of capital markets in the short term will be considered
My interpretation of Liu He’s words
Now Liu He is a very senior guy who among others, led China trade negotiations with Trump.
So if Liu He says something like this, it’s worth listening.
Take it with a pinch of salt, but the way I’m reading it, is that:
More crackdowns on tech are still coming.
But the pace may slow down in the short term.
And they will be better communicated to markets in advance.
Monetary Policy + Real Estate crackdown
There’s good news for monetary policy and real estate too.
Long story short – expect looser monetary policy going forward. Most likely in the form of a reserve cut for banks and cutting of interest rates.
Oh, and property tax will not be expanded to the rest of China, and the Real Estate crackdown will be “studied”.
Key question – Will Xi walk the talk?
Now of course, it’s one thing to say this.
The million dollar question is whether Xi will walk the talk.
The same thing happened in 2018 when Beijing gave verbal support, which was quickly backed up with market reforms.
And even then, the market only bottomed out 2 – 3 months later.
Initial signs are promising…
Initial signs are promising though.
The People’s Bank of China intervened to weaken the yuan this week.
China also distanced itself from Russia’s attack on Ukraine to minimize the risk of potential U.S. sanctions.
Xi also signalled a shift in a longstanding Covid-fighting strategy by pledging to reduce its economic impact.
Is this enough?
Of course, from an actions point of view this is not enough.
Tech is still in a world of pain, with Tencent and Alibaba cutting 10% – 25% of their staff due to slowing growth.
China real estate junk bonds are trading well in double digit yields, with many developers on the brink of default.
But that said – the symbolism of this move should not be underestimated.
If Beijing does back it up with concrete actions in the months ahead, this could well signal the turning point for China stocks this cycle.
Makes sense from a timing perspective
This makes sense from a timing perspective too.
The key event this year is the Party Congress in Oct/Nov, where Xi is up to be “renominated” for an unprecedented third term.
Which means that Xi needs some positive economic momentum going into the second half of the year.
Working backwards, it would make sense for the policy crackdowns to bottom sometime around Q2 2022, to allow economic momentum to build heading into the Party Congress.
Valuations are dirt cheap
Valuations are very cheap too.
China stock valuations traded at a rare discount to the S&P500 the past week.
Diving into specific names:
Real estate plays like CapitaLand China Trust trade at a 30% discount to book and a 7.5% yield.
Hang Lung at 5% yield.
ICBC at a 7% yield.
Ping An at a 5% yield.
Tencent at 16 times trailing P/E.
Broader Macro Picture for China?
I wrote a lengthy post for Patrons the past week to share views on China.
You can sign up here if you’re keen.
The long and short is that China faces some real headwinds in the months ahead.
They still have to find a way to get out of COVID zero, with a more contagious Omicron, and vaccines that are less effective than Western mRNA vaccines.
The real estate slowdown is still playing out like a slow-motion train wreck, with a number of real estate players on the brink of default.
China is a major commodities importer, so the soaring commodities prices will hit them hard.
China most definitely isn’t out of the woods yet.
But again, one can’t help but wonder if Liu He’s remarks might just mark the turning point this cycle.
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How am I investing?
Don’t forget the broader macro
What I would add though, is that as a Singapore investor, we’re free to invest in US, Europe, or Singapore stocks alongside China.
So while China operates on a different monetary cycle from the west, it still pays to keep track of Western macro cycles because well… if US/Singapore stocks crash, one may choose to allocate money there instead of China.
And that’s where things get slightly nutty.
Jerome Powell will hike 6 more times this year… to 2.8% by end 2023
The past week the US Federal Reserve hiked interest rates by 0.25%.
But what’s interesting, is their forecast for what happens next.
They’re basically saying:
- 6 more rate hikes this year, to 1.9% by Dec 2022
- Quantitative Tightening to start in May, at double the pace the previous cycle
- Fed Funds rate to be at 2.8% by 2023
I don’t know about you, but in my books there is no way the Feds are taking us to 2.8% Fed Funds Rate without a major break in the global economy.
I mean… it’s not impossible, but I just struggle to see how the global economy can survive at 2.8% interest rates by end 2023, with quantitative tightening playing out in full.
If they do pull it off, Jerome Powell will go down in history as the best central banker of all time.
More realistically though, something is going to break in the markets before end 2023, and chances are it’s going to be well before that.
Looking at US financial conditions, they’re already at 2018 levels.
Or in other words – US financial conditions at the start of this rate hike cycle, are as tight as they were at the end of the previous rate hike cycle.
Whatever the case, bond markets are having none of it.
US 2s10s yield curve is at 0.24 bps, which means we’re just 1 rate hike (or 2 months) away from yield curve inversion, which starts the clock on a US recession.
Okay rant aside – I think we’re heading right into a global economic slowdown, which may hit global stock valuations hard. Short term rallies aside, I would expect more downside before this cycle is over.
Is this the bottom for China stocks?
So… is this the bottom for China stocks?
Frankly I don’t know, but it could well be.
Liu He is a senior guy, I would be surprised if he made remarks like that and Beijing doesn’t come out to back him up in the weeks ahead.
Timing wise it makes sense too, building up positive economic momentum heading into the Party Congress.
Valuations are cheap too.
Am I buying China stocks?
I’ve been talking for months about how I think global stocks (ex China) will drop in 2022.
The Federal Reserve the past week, at least in my view, basically confirmed that view.
With the Feds this hawkish, I find it hard to see how we’re going to avoid a global economic slowdown that will hit stock valuations.
Which means that any money I deploy into China now, is money I am not deploying into US/Singapore stocks later this year.
Which makes it quite a tricky decision.
I’ve been buying small positions in China banks and China focussed REITs, but so far no big moves from me yet. All my long term positions I’m still holding though, so I do benefit from any upside move.
I think whatever the case, it makes sense to take a deeper look at China stock valuations now. I’ll be updating my China stock watch this week to look at prices and valuations, and share the names that I would be interested in. For those who are keen, you can sign up on Patreon.
I would love to hear what you think!
As always, this article is written on 19 March 2022 and will not be updated going forward. Latest thoughts (and my stock watch and personal portfolio) are available on Patreon.
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