‘Flood the economy’: China’s stimulus errors hurt stocks as funds flee to India, Japan, US markets, strategist says

Beijing’s preference for piecemeal and increasing easing is ‘worrying,’ Alpine Macro strategist says

`As far as Chinese stocks are concerned, they have become extremely cheap, especially compared with the US and India’

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A woman walks past an electronic board showing Japan’s Nikkei average and stock prices outside a brokerage, in Tokyo in March 2023. Photo: Reuters

Published: 9:00am, 28 Jun 2023

China’s stubborn preference for piecemeal and incremental easing is “worrying” and the risk of policy errors has partly contributed to a sharp discount in the nation’s stocks relative to high-flying equities in the US and India, according to Alpine Macro.

“It has become too deeply embedded in the belief that any attempt to ‘flood’ the economy with policy stimulus can only create a temporary ‘sugar high’ and will further exaggerate imbalances,” Yan Wang, chief China strategist, said in a report on Tuesday. “We have long viewed this as a profound policy error and a key reason behind China’s structural deterioration in economic growth in recent years.”

The “basic and most important imbalance” in the Chinese economy is the country’s chronic excess savings and consequently, insufficient aggregate demand, Wang said. “The imbalance needs to be offset by the government.”

More than US$150 billion of market value evaporated in the MSCI China Index’s six-day slump through Monday, its worst slide since April. China’s stimulus measures, such as policy rate cuts, have failed to overturn pessimism about China’s outlook. The index tracks US$2.3 trillion of stocks listed at home and abroad.

As a consequence, money managers have spurned Chinese assets to chase better returns in India and Japan. Foreign investors were net buyers of US$730 million onshore stocks this quarter, versus US$27 billion in the first three months of 2023, Stock Connect data showed.

At the same time, Japan and India have seen the largest foreign net purchases in Asia this quarter, with US$45 billion and US$10 billion inflows, according to data compiled by Goldman Sachs. Hedge funds have separately pulled about 70 per cent of the money they ploughed into China during the reopening euphoria, it added.