For a market deemed on the verge of “uninvestable” a few months ago, China is looking pretty perky. Tea
iShares MSCI China
exchange-traded fund (ticker: MCHI) has climbed 22% from a low in early May. The S&P 500 lost 4% in that time.
Investors see the good times rolling a while longer. “Two months ago we didn’t have any strategies that were long Chinese equities,” says Michael Kelly, head of PineBridge Investments’ multiasset strategy “Now we do.”
Each of the thunder clouds that formed a perfect storm over China early this year has brightened, if not dissipated. Shanghai’s two-month Covid 19 lockdown ended May 31. A “dynamic Covid” policy shift promises less draconian measures going forward. Policymakers have returned to economic stimulus mode, raising rebound hopes for the cratering, all-important property sector.
Regulatory assaults on internet companies have eased. Share in
Alibaba Group Ho
lding (BABA), which bore the burnt of Beijing’s “reforms,” have soared 20% in the past month.
All these trends look to have legs.
Authorities have steadily ratcheted down testing and quarantine requirements for Covid, with the implicit goal of not repeating the Shanghai debacle. At least that’s what markets think. “The chance is low for another long lockdown in big cities,” says Larry Hu, chief China economist at Macquarie Group. “Policymakers will likely tweak the definition of ‘zero-Covid’ to make it less disruptive.”
The macroeconomic tone has shifted from last year’s “shared prosperity” to getting a supine economy back on its feet. China will still “strive to achieve the economic and social targets for this year,” President Xi Jinping recently announced. In Beijing-speak, that means ramping stimulus to expand at a 7% clip for the rest of 2022, Hu calculates.
A key element of that campaign should be cutting mortgage rates. The central bank trimmed the cost of lending by 0.15% in May, with bolder moves expected.
Beijing’s war on big tech, and whether it’s winding down, is the most nebulous of China’s market indicators. Investors have taken heart from the rising profile of premier Li Keqiang and his deputy Liu He, seen as leaders of the government’s pro-business wing. “Tech entrepreneurs are the most important agents of innovation,” Liu declared at a May conference.
Increasing publicity around youth unemployment, which has reached 18% by official tallies, is also seen as positive for the tech giants, who were job-creating machines in better days. “It feels like a ceasefire in the tech crackdown, time for collaboration,” says Jason Hsu, chief investment officer at Rayliant Global Advisors.
Investors differ on how to take advantage of China’s rebound momentum. Tom Masi, co-manager of the emerging wealth strategy at GW&K Investment Management, is all in for “recovery” stocks that can boom on the Covid easing. Picks include
Huazhu Hotels Group
(HTHT), online travel marketplace
(TCOM) and Macau-based casino operator
(1928.Hong Kong). “Covid policy may still be bumpy over the next year or so, but there’s a lot of bright sky on the other side of the horizon,” he says.
Hsu tilts more toward blue chips like
China Construction Bank
(939.Hong Kong), at the heart of the pipeline for stimulus, and buying by state investment funds. “They’re going back to the old playbook of driving growth through infrastructure,” he says. “There’s a tailwind for favorite sounds.”
PineBridge’s Kelly is more intrigued by high-yield bonds offered by downtrodden property developers. The sector’s shakeout, which started with high-flying
China Evergrande Group
(3333. Hong Kong) implosion last September, has reached bottom, he believes. “We see one or two handfuls of developers who will default, and about 15 we can invest in,” Kelly says. “Those survivor companies have been getting lifelines the last four to six weeks.”
One thing doesn’t change in China whether the market is hot or not: Success depends on reading a government that is, to say the least, reluctant to be read. Signs point to less disruption and more free lunches from now till October, when a Communist Party congress convenes, presumably to grant Xi a precedent-breaking third term in power. “When their tiger mom attitude toward markets gets markets too irritated, they do something better, Rayliant’s Hsu comments.
Xi’s intentions for the world’s No. 2 economy are murkier after his effective coronation. So is the outlook for investing. “This is more than a dead-cat bounce,” Kelly says. “But we can’t call it a long bull market until we see what happens after October.”