China Stock Turmoil 2015

Barclays to BlackRock see China rebound fading after central bank rate cut

Beijing has used a range of measures to try to control a drop-off in GDP growth

PUBLISHED : Monday, 26 October, 2015, 8:28am
UPDATED : Monday, 26 October, 2015, 2:51pm

The rebound in mainland Chinese equities spurred by the central government’s efforts to boost growth will probably fade as the measures underscore fundamental weakness in the world’s second-largest economy, according to Barclays, Blackfriars Asset Management and BlackRock.

A US$582 million exchange-traded fund tracking mainland stocks jumped to a two-month high in the United States on Friday as the People’s Bank of China, after the close of local trading, announced its sixth interest-rate cut since November. The gain pushed the advance from this year’s low in August to 23 per cent. The rebound has been driven in large part by speculation that the central government will move more aggressively to bolster an economy projected to expand this year at the slowest pace in a quarter century.

Beijing has used a range of measures to try to control a drop-off in gross domestic product growth, which peaked at 14.2 per cent in 2007 and will probably slow to 6.8 per cent this year, according to a survey of economists. In addition to lowering interest rates and banks’ reserve requirements, the government has introduced targeted stimulus to the real estate, car and casino industries. While data this month showed GDP increased 6.9 per cent in the third quarter, the expansion was boosted by a surge in financial services because of an increase in securities trading.

Longer term, there are more issues that need to be solved before one could be uniformly bullish about China
Tony Hann, Blackfriars Asset Management

“I don’t think this is the start of a new move in Chinese equities higher,” Ajay Rajadhyaksha, head of macro research at Barclays, said. Beijing needs economic “growth numbers to improve sharply, and that does not seem to be happening”, he said.

Price swings in the Bloomberg index of US-traded Chinese companies are near the widest since late 2011 following a rout that pushed the gauge down 33 per cent from its June peak. The Shanghai Composite Index plunged as much as 43 per cent during the same period, wiping out about US$5 trillion in market value.

“Short-term the markets will take this positively,” Tony Hann, head of equities at Blackfriars Asset Management in London, which invests in Asian stocks. “Longer term, there are more issues that need to be solved before one could be uniformly bullish about China.”

As Communist Party leaders gather this week to formulate policies for the next five-year economic and social plan, they are expected to announce a dismantling of currency controls, lower barriers for foreign non-bank financial firms, emphasise home-grown technologies and make population growth a priority. Officials are targeting GDP expansion of about 7 per cent this year.

“The market has already priced in the possibility of China stability and policy action,” said Amer Bisat, managing director and portfolio manager for emerging markets at BlackRock. “Policy actions are supportive, but you need the fundamental picture to improve.”

While the mainland should avoid a “severe” contraction, an economic slowdown was “absolutely necessary” for an economy that took on too much debt too quickly and “invested in capacity that became excessive in nature”, Bisat said.

President Xi Jinping said during a state visit to Britain last week that China would not see a “hard landing”, despite the pressures on the economy. Some investors are betting the government is poised to implement even more measures to cushion the slowdown.

“This is not just a flash in the pan,” said Brian Jacobsen, who helps oversee US$242 billion as the chief portfolio strategist at Wells Fargo Advantage Funds. “The timing is particularly important. They are cutting rates ahead of the fifth plenum, where they are really going to pull out the big guns to try and support growth.”

Deutsche X-trackers Harvest CSI 300 China A-Shares ETF jumped 2.7 per cent to US$36.90 in New York on Friday, narrowing its decline for the year to 0.8 per cent. The Bloomberg China-US Equity Index advanced 2.8 per cent to 113.57, pushing its 2015 gain to 4 per cent.

Copper futures declined for the fifth time in six days on Friday as commodity traders shifted from optimism over mainland China’s interest-rate cut to focusing on its lacklustre demand for raw materials. The mainland accounts for almost half of global demand for the metal.

“If the economy was growing so close to the target, there would be no need for stimulus,” Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, said. “The Chinese government is obviously really worried by what they see and they feel compelled to act.”