Macroscope | Dovish Federal Reserve policy spurs a rally, including in Chinese real estate, but it’s probably just a bubble

As recently as the end of last summer, when China’s stock market was in free fall, analysts were speculating about the extent to which the so-called “national team” – the collection of state-backed institutional investors set up by the government in 2015 to stabilise the market during times of extreme turbulence – was being leaned on by Beijing to prop up the world’s worst-performing major equity market.

Part of the rebound can be attributed to recent deregulatory measures designed to lure investors back. Since the beginning of this year, China’s securities watchdog has done away with an automatic margin call threshold, allowed more types of collateral for certain kinds of loans and provided more incentives for foreign funds to purchase local stocks and bonds. Last month, overseas investors poured a record US$9 billion into onshore shares through the Stock Connect scheme, according to the Financial Times.

Another factor is cheaper valuations following last year’s bloodbath in Chinese stocks. The forward price-to-earnings ratio – a popular valuation measure – of the CSI 300 stood at just above 10 at the end of January, down from 14 at the beginning of last year and significantly below the ratios for both the MSCI Emerging Market Index and the benchmark S&P 500 Index which stood at 11.4 and 16 respectively, last month, according to data from JPMorgan. For many investors, Chinese shares offer an attractive entry point with considerable upside provided there is a breakthrough in trade negotiations and the government’s stimulus measures start to pay off.

The rebound in Chinese stocks is part of a broader recovery in so-called “risk assets” which began in the New Year when policymakers at the Federal Reserve started sounding more dovish. This culminated in the stunning decision by the Fed late last month to put its interest-rate-hiking campaign on hold, and even hint at a possible rate cut if the global slowdown causes America’s economy to slow sharply.