Xi's China Markets Lifeline Raises Hope Rally Can Hold This Time
Comment of the Day

July 25 2023

Commentary by Eoin Treacy

Xi's China Markets Lifeline Raises Hope Rally Can Hold This Time

This article from Bloomberg may be of interest. Here is a section:

They’re betting a more forceful pro-growth tone from the top will be enough to fuel a tradeable rally — and may auger more success in tackling China’s wide array of challenges from mountains of local government debt to a slumping housing market.

“Clearly, markets have been disappointed as they anticipated more rapid improvements, but they are now beginning to rationalize their growth expectations,” said Andrew McCaffery, global chief investment officer at Fidelity International. “Our view is that this somewhat unexciting period will eventually give way to a more positive market tone.”

The big question is whether the follow-through from authorities will sustain the rebound. Brief bursts of optimism as China emerged from strict Covid restrictions have repeatedly turned into losses, making Chinese markets among the region’s worst performers amid a stream of grim economic data.

Eoin Treacy's view

The Chinese stock market depends on the patronage of the government to instill enough confidence to propel bull runs. So far, the market has been long government platitudes but short on action. That has resulted in several rebounds from deep oversold conditions, only for the rallies to fail as the absence of a big-bang action weighs on confidence.

China Vanke has a P/E of 5.12 and a dividend yield of 7.08% and jumped more than 10% today in response to the most recent government announcement of support. It is working on a weekly key reversal from a deep oversold condition.

The challenge is that today’s reversal of yesterday’s decline has not yet broken the downtrend. There is a good chance we are about to see a significant counter trend rally to unwind the oversold but the major test will be where the next point of support comes in following that rally.

The Hang Seng Properties Index is in the process of putting in a high reaction low and displays better evidence of bottoming.

The Renminbi continues to bounce from its recent lows and is unwinding the short-term oversold condition. Clear efforts to support the property market with outsized stimulus are unlikely to result in a firm currency. 

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