Last night, we witnessed the latest attempt to spark positivity in Chinese assets and reignite market confidence. The head of the Bank of China cut the reserve requirement ratio, policy rate, and mortgage rate, while also announcing increased liquidity measures and a swap facility. He also mentioned they were considering a ‘stock stabilisation’ fund but didn’t elaborate further.
Simultaneously, the head of the regulatory commission hinted at future measures to make mergers and acquisitions more appealing to market participants.
During our webinar last week, we were asked whether we remain relatively bullish on China. The IA China sector has been falling relative to the IA Global sector since February 2021, with only occasional short periods of outperformance, all of which turned out to be false dawns for investors.
These brief periods of potential improvement followed positive noises or piecemeal changes to rates or legislation from the government or quasi-government institutions. Unfortunately, there was never enough follow-through to shift market sentiment or revive investor appetite. Worse, each time the markets fell back and Chinese assets lost ground to broader global markets, it reinforced the narrative that China was either uninvestable or, at best, barely worth investors’ attention.
One point we made during that webinar is that China has repeatedly failed to implement sufficient fiscal and monetary stimuli. Further piecemeal stimulus and reassuring rhetoric will almost certainly not move the needle.
Our takeaway from these latest developments is that the Chinese leadership clearly recognises the need for action if they are to achieve their economic goals. If they fail to deliver economic prosperity to a sufficiently large segment of the population, the communist leadership will eventually face an existential crisis.
However, what has been proposed so far falls far short of what’s needed. Investors will be looking for continuous, positive announcements and sustained action to confirm that the Chinese authorities are serious about getting things moving and keeping the pressure on.
With regard to our positioning, we continue to maintain exposure to China through Asian and GEM funds rather than explicit Chinese equities. As always, we monitor developments daily to ensure our holdings remain appropriate for the evolving environment.
In summary, it’s positive, and markets have bounced, but we have seen this movie before. Let’s hope this time it has a different ending. If it turns out to be another false start, they are just making it even harder the next time they try to revive the animal spirits.
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