Macroscope | Investors right to eye Chinese stocks but must watch underpinnings of growth

Investors who expected China’s reopening rally to continue at a blistering pace were asking too much given the uncertainties facing the world economy

However, there is also a case to be made that markets are too complacent about the sustainability of China’s recovery, given structural and political challenges

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A man takes a selfie with the Bund Bull in Shanghai on February 28. Chinese stocks remain near historically low valuations and offer much promise to investors, but those hoping for a continuation of China’s reopening rally need to pay more attention to the underpinnings of the country’s growth. Photo: Bloomberg

Published: 4:45pm, 9 Mar 2023

The MSCI China Index, which tracks Chinese stocks listed at home and abroad, has risen slightly more than 5 per cent since the start of this year. This is just a tad more than the gains enjoyed by the MSCI World Index, a gauge of shares in advanced economies.

For investors betting on a strong snapback in the word’s biggest developing economy following the dramatic dismantling of the zero-Covid policy last December, the relatively poor performance of Chinese equities this year is a kick in the teeth.

China’s reopening rally began in early November, with the MSCI China Index surging 36 per cent in the final two months of 2022. Yet, after continuing their rapid ascent in January, Chinese stocks fell sharply last month, fuelling a debate about the sustainability of the rally and the underpinnings of the recovery.

In a report published on March 4, JPMorgan noted that “our tracking of China-sensitive assets suggests there is no longer any excessive optimism being priced into financial assets regarding near-term cyclical upsides in China”. Put simply, a fresh catalyst is required for the rally to resume.

Markets had hoped the annual gathering of China’s National People’s Congress this month would be the trigger for the resumption of the rally. However, the announcement on Sunday of a lower-than-expected growth target of 5 per cent for this year – which reduces the scope for more aggressive stimulus, thus providing less of a boost to an ailing global economy – caused sentiment to deteriorate further.

Still, it is important to put things in perspective. As recently as October, the prospect of a rapid reopening seemed highly implausible. Who would have predicted that Chinese stocks would be up 53 per cent in the ensuing three months, manufacturing activity in February would grow at its fastest clip in a decade and Thailand would be expecting upwards of 8 million Chinese tourists this year, compared with the roughly 280,000 it welcomed last year?

.css-1m2rp1p{color:#34b8b5;}Macroscope | Investors right to eye Chinese stocks but must watch underpinnings of growth

Macroscope | Investors right to eye Chinese stocks but must watch underpinnings of growth