Chinese stocks have history backing to end pain with Daiwa, BNP Paribas banking on final-quarter market surprises

China’s biggest stocks have often rallied in the final quarter of the year over the past 13 years, raising hopes for a halt to the 23 per cent rout so far this year
The market could be boosted by possible surprises after the Communist Party concludes its 20th congress this month, Daiwa analyst says

China stock market

Jiaxing Li

Published: 7:33am, 3 Oct, 2022

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Investors who have fretted about the slump in Chinese stocks so far this year, could be in for a surprise in the final quarter, with history in the past 13 years on their side, as a tweak to China’s controversial zero-Covid policy could come sooner than expected.

The CSI 300 Index of the biggest onshore Chinese stocks has risen in the final three months in 10 of the past 13 years, according to Bloomberg data. Even in the worst pandemic year in 2020, the benchmark surged by 14 per cent in this period, the best final three-month since 2015.

This quarter might deliver the boost for a downtrodden market, according to Daiwa Capital Markets strategist Patrick Pan. The catalysts might come from possible surprises after the Communist Party concludes its 20th congress later this month. If so, they could add urgency to an underwhelming mix of stimulus and calls for changes to China’s zero-Covid policy.

“China’s stock market usually outperforms in the second half of the year,” Pan said, as the fourth quarter is the high season for infrastructure investments and home sales. In the current downturn, the market is now anticipating more bailout measures, especially in the property and financial sectors, he added.

The CSI 300 has declined 23 per cent so far this year and is set for its worst January-to-September performance since a 55 per cent slump during the global financial crisis in 2008. The yuan has weakened 11 per cent to a record-low against the US dollar. China’s financial markets will close for all of next week for the country’s national day holiday.

“It is highly unlikely that China will abandon its zero-Covid policy in one fell swoop,” China strategists at Montreal-based BCA said in a September 30 report. “That said, some easing in lockdown measures is likely by early next year, which is sooner than most investors expect.”

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China’s central bank this week lowered the floor on mortgage rates for first home purchases in cities suffering from housing market retrenchments, a first instance of central-government support for the industry in recent times. Last month, it decided to extend a tax break for electric vehicle purchases through 2023 to spur spending.

BNP Paribas expects the 20th party congress – which will set new leadership and policy direction for the next five years – to be followed by a substantial let-up in the zero-Covid policy, according to a report published on September 28. A notable step could be to reclassify Covid-19 as a Class-B pandemic from a Class A pandemic currently before March 2023, it said.

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The firm is neutral on China, having downgraded the market from overweight in March. It raised Hong Kong to overweight in its model portfolio tweaks on September 28 by adding JD.com, Galaxy Entertainment and Trip.com and removing Alibaba Group Holding, Xpeng Motors and Shenzhen Inovance.

Other analysts are hoping that the major economic setbacks thus far will galvanise policymakers into stronger action. The zero-Covid policy, which has become the biggest bugbear for stock investors, could come to a tipping point after the party’s congress, according to French investment bank Natixis, as more Wall Street banks have tempered their growth and earnings projections.

Daiwa’s Pan said he expected some “fine-tuning” in China’s Covid-19 control measures later this year, such as quarantine cuts or the removal of restrictions on international flights. With limited fiscal support, China may gradually shift to easing policies and regulations, he added.

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“It’s very likely [that we will] see some early signs of relaxation after October, which will help the market sentiment, but a full reopening might not come any time soon,” said Gary Ng, a senior economist in Hong Kong at Natixis.

“The chance is still there for China’s equity market to outperform other countries for the rest of the year.”