China’s foreign investors hope stimulus will end ‘deep winter’

China’s stimulus package unveiled in the run-up to a holiday marking 75 years of the People’s Republic was greeted as a gift by ecstatic domestic investors. Now foreign investors need to decide whether to join the party.

The package, which targeted the country’s depressed stock and property markets, helped drive the benchmark equity index up 24 per cent in the space of a week. Hong Kong’s Hang Seng index rose nearly 7 per cent on Wednesday morning, while mainland Chinese markets were closed for the week.

Still, many foreign investors want to see if the package will be backed by heavy fiscal spending as they decide whether to upgrade underweight positions. Private equity and foreign direct investors, meanwhile, want reforms to fix underlying problems in China’s economy, such as how to boost domestic consumption and curb deflationary pressures.

“Is this time different? We have seen these fits and starts where China puts in place some kind of stimulus and it has not resulted in a long-term constructive recovery,” said Saira Malik, chief investment officer of US asset manager Nuveen, which has $1.3tn in assets under management.

“This time it still looks to us that its impact is greater for the stock market than the economy. Before we became more structurally bullish we’d be looking for more follow-through in terms of a pick-up in economic activity.”

Last week “was a clear turning point for the China A-share market . . . investor confidence has been restored significantly”, said Thomas Fang, head of China global markets at UBS, referring to shares listed in mainland China. He also said “follow-through measures” would be critical to convincing foreign investors to change their longer-term views.

The stimulus measures include unprecedented direct support from the central bank for institutional investors to purchase stocks and for companies to conduct share buybacks. The government also cut benchmark interest and mortgage rates.

The Communist party politburo, led by President Xi Jinping, strongly backed fiscal support for the economy, while cabinet head Li Qiang repeated the message on Sunday. This has strengthened expectations that fiscal spending will follow the monetary easing, though details have yet to be released.

Before the rally, many foreign fund managers were underweight on China. A monthly survey of global fund managers by Bank of America showed that in September, being short or negative on Chinese stocks was seen as the second-most crowded trade in the world, behind buying the so-called Magnificent Seven tech stocks that have driven US markets to record highs this year.

Before the stimulus-related rally, which increased China’s stock market turnover by about five times, the foreign share of trading volume was about 10-15 per cent, said UBS’s Fang.

“We anticipate that [global] funds will need to restore their Chinese investments to a more rational level,” said Yu Chen Jun, deputy chief investment officer for equities at Value Partners.

KraneShares CSI China Internet ETF, the largest China-focused, US-listed exchange traded fund by assets, reported $408mn in net inflows last week, the biggest since June 2022.

“When Xi Jinping gets involved you know the answer is unlimited support” for the stock market, said Beeneet Kothari, founder of Tekne Capital Management, which invests about $1bn in tech companies outside the US, more than half of which is in China.

“Then you get the benefit of higher stock prices creating more benefits at [the] CEO level, leading to higher spending and downstream effects,” Kothari said, adding that the fund had “aggressively” increased its positioning in China in the first half of 2024.

Investors had pulled $4.2bn out of US-domiciled China, Hong Kong and Taiwan equity ETFs and mutual funds from the start of 2024 until the end of August, according to Morningstar Direct data.

Michael Metcalfe, head of macro strategy at State Street, said inflows last Tuesday and Wednesday represented the strongest two-day run the bank had seen since China’s post-Covid reopening in January 2023.

State Street’s role as a custodian bank gives it oversight of asset flows. Investors are still underweight on Chinese stocks and are only reducing that gradually. “It depends on investors’ timeframe, but if in six months’ time, there’s more evidence that policy changes are biting, investors will be encouraged to reduce the underweight [position] more,” Metcalfe said.

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Others cautioned that the Chinese market faced external risks such as the possible re-election of Donald Trump, who has promised to increase tariffs on Chinese goods.

“The difficulty is to run China risk into the US election, where Trump trades may make a comeback,” wrote Dirk Willer, Citi’s global head of macro research, in a note to clients on Friday.

Still, it was positive that China was seeking to stimulate the economy while the US was doing the same through interest rate cuts, said George Gatch, chief executive of JPMorgan Asset Management. “That is likely to be a positive for global demand and markets,” he said.

Outside listed equities, the sentiment of foreign investors is mixed, especially among private equity and venture capital firms, which have been hardest hit by China’s slump.

“It’s a very deep winter there right now,” said Ed Grefenstette, chief executive of Pittsburgh-based trust The Dietrich Foundation, which invests in private market funds.

He estimated that 40-80 per cent of the venture capital groups in China might not raise a new fund, which he said would be an “extraordinary restructuring of the system”.

But Yup Kim, chief investment officer of the Texas Municipal Retirement System, said: “Up until 2020 I was a very strong China bull. In the short term, it’s very difficult to say, but I do think in the next 10 to 15 years there’s just going to be a lot of equity value created across Chinese companies.”

Kevin Lu, a partner at the Swiss private equity firm Partners Group, said his company was “contemplating very seriously” setting up a local onshore, renminbi-denominated fund.

For institutional investors, the confidence boost will need to be followed by more targeted fiscal measures, particularly to boost households suffering from depressed property prices, salary cuts and a weak job market.

“We’ve only just begun to see urgency on the part of the authorities there,” said Guy Miller, chief market strategist and economist at Zurich Insurance. 

Foreign executives in China are also circumspect. Julian Fisher, chair of the British Chambers of Commerce in China, said while “any measures to stabilise the economy and increase domestic consumption” were welcome, “it is far too early to tell” if this would benefit British business. He highlighted Beijing’s slow progress on market access issues for foreign investors.

Jens Eskelund, president of the EU Chamber of Commerce in China, said the strong signals on stimulus were positive, but fundamental reforms to rebalance China’s economy towards domestic demand were still lacking. “We don’t really see anything that indicates that China is moving away from that sort of investment-driven, state-led, export-oriented economy.”

Ultimately, said Archie Hart, co-portfolio manager for the emerging markets equity portfolios at Ninety One, “if this is the last policy pronouncement for a while, then euphoria will fade quite quickly”.

Reporting by Joe Leahy in Beijing, Arjun Neil Alim in Hong Kong, Kaye Wiggins in Singapore, Jennifer Hughes and Sun Yu in New York, Ian Smith and Alan Livsey in London and Ilya Gridneff in Toronto

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