Can Chinese stocks rally before Communist Party congress? Goldman says history may not repeat this year

Weak economy hobbled by Covid-19 lockdowns may break precedent of market rally in the run up to Communist Party congress
The MSCI China Index has declined 5.5 per cent in the past month, bringing this year’s slump to 26 per cent

China stock market

Zhang Shidongin Shanghai

Published: 4:36pm, 19 Sep, 2022

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Investors banking on gains in Chinese stocks in the run up to the Communist Party’s 20th national congress scheduled for next month may be disappointed if history does not repeat itself this time, according to Goldman Sachs.

Without a leadership transition, and against the backdrop of a weak economy hobbled by lockdowns, Chinese stocks represented by the MSCI China Index may struggle to reproduce the upside seen during the three months preceding th e twice-a-decade congress since 1992, partly because of the underlying weakness in the economy this year.

“It is uncertain whether the historical precedents will be valid this time for two main reasons,” analysts including Kinger Lau and Si Fu wrote in reports dated September 18. China’s adherence to the zero-Covid policy could soften the policy easing impulse, while changes to the policy are unlikely to come before April next year, they added.

The MSCI China Index, which tracks 717 stocks with a market capitalisation of US$2.4 trillion, has declined 5.5 per cent over the past month, bringing the losses this year to 26 per cent.

Historically, the index has gained 2 per cent on average one month before the congress, according to data compiled by Goldman. The upside was even more stunning, at 12 per cent, three months before the gathering, partly fuelled by valuation expansion on the back of supportive economic policies and robust growth momentum, the analysts said.

The US investment bank estimated that the parts of the nation that have been placed under some form of Covid-19 lockdowns account for 29 per cent of the economy. That is compounded by the ongoing crisis in the housing market, a sizeable economic engine.

Goldman has trimmed its 2022 forecast for China’s economic growth three times this year to 3 per cent from 4.5 per cent, more bearish than the current market consensus of 3.5 per cent. It expects zero growth in corporate earnings, versus a 5 per cent forecast among equity analysts. Excluding banks and energy producers, listed companies reported a 6 per cent drop in earnings in the first half of this year, it said.

Goldman Sachs lists at least seven hurdles to a 20 per cent upside in China’s battered stocks amid market turbulence

If there is any consolation, Chinese stocks performed better in the run-up to the congress in 1997, 2007 and 2017, when there was no position transition of the Party Secretary. President Xi Jinping, the incumbent, is expected to break the two-term tradition by extending his power for a third term at the congress next month.

“Our economists also do not expect a drastic shift of policy dynamics post the Congress,” Goldman said in the report. “Assuming the composition of top Party leadership remains relatively stable, our economists believe that China’s long-term policy goals including manufacturing upgrade, supply chain security, decarbonisation, and the promotion of common prosperity will be further emphasised and pursued.”

Investors should align their portfolio with China’s strategic policy directions, Goldman said. The onshore A-share market is better placed to profit from any bullish outcome given the low foreign ownership and less exposure to US-China tensions.

China’s state-backed funds, the so-called national team with an estimated 400 billion yuan (US$57 billion) of investing power, are likely to intervene and support stock prices in the face of market adversity, the analysts said.