2023 has been somewhat disappointing for Chinese stocks. The COVID recovery rally seen late in 2022 has dissipated with the flat-lining of key Chinese economic data.
Most recently, offical data released last week showed manufacturing activity in the nation fell for the third consecutive month. It came amid softening trade, rising youth unemployment, and a property sector which continues to slow.
Amongst the world of investors, there are two broad camps when it comes to the outlook for Chinese stocks.
Those who think China’s lacklustre post-lockdown recovery is part of a greater structural decline, and those who think it’s more short-term and related to divergent Government policy, compared to the west.
Those in the ‘structural decline’ camp say the golden era of Chinese growth is over forever, mainly due to an ageing population, slowing productivity and the evolving priorities of the Xi Jinping administration, which (publicly at least) place common prosperity above all else.
However, there remains many investors who still think Chinese stocks are very attractive long term investments. They look beyond the post-COVID era underperformance, putting it down to the fact the Chinese Government has so far showed far more restraint when it comes to COVID stimulus, relative to the United States and most other western economies where trillions of dollars worth of economic stimulus has been unleashed.
This lack of stimulus has stunted the recovery of China’s middle class, which has had ripple effects into the wider economy. But by holding back, China has a lot of dry powder and it has allowed the country to avoid the inflation problems experienced in the west.
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Will Chinese stocks surge on a major stimulus announcement?
Investors have been waiting for a major fiscal stimulus announcement, but it hasn’t come… yet.
In June, the People’s Bank of China provided a small signal that the country was ready to stimulate the economy after it cut its key interest rate for the first time in 10 months. The 10 basis point cut to 2.65% on China’s medium-term lending facility was immediately welcomed by investors. The Hang Seng tech index lifted 2% in the hours following the announcement.
However, what investors are really holding out for is a major Government policy announcement, in the form of infrastructure or consumption stimulus.
News on that front is widely expected to come at a highly-anticipated meeting of China’s Politburo this month (July).
No exact date has been made public for the meeting at the time of writing, however the peak policy-setting body is formally scheduled to meet before the end of the month.
“Market chatter indicated the Politburo meeting may introduce more monetary and fiscal measures to support the property and infrastructure sectors in the second half of 2023, in a bid to cushion slowed economic growth,” said S&P Global in a recent update.
“Some market sources expected any further stimulus is likely to be limited by the rapid weakening of the Yuan’s exchange rate. Instead, more could be done in sectors linked to high-end manufacturing or digital economy, which are much less steel-intensive than property and infrastructure.”
Analysts at Citi Hong Kong also believe the July meeting will bring news on fiscal stimulus.
“The meeting will see a discussion about a more comprehensive stimulus package,” said Citi in a note seen by Asia Markets.
So, there is no doubt Chinese stock market investors will be keeping a keen eye on the Politburo developments, which could come within days.
Should the meeting signal a major policy move towards a big stimulus package, expect Chinese stocks to soar.
Anything less could sour sentiment around the Chinese stock market and economy even further.
Related: “A lot has changed”: China’s economic woes understated says Capital Economics