Cause To Buy, Cause To Sell China's New Bull Market

The divide between those reversing China short positions, which earlier this month Bank of America Corp found was among the globe's most crowded trade, and the unrelenting China bears is where President Xi's team should be focused if it hopes to sustain the bull run.

That means leaning into the rally with bold moves to implement the liberalizing reforms his Communist Party has been pledging since 2013 but has failed to deliver.

For now, China's sudden return to monetary stimulus mode has the world's attention. But economist Zhiwei Zhang at Pinpoint Asset Management speaks for many when he stresses that“the key policy to address the macro challenge remains to be fiscal.”

Local media are buzzing about an additional 2 trillion yuan (US$285 billion) worth of bond sales in short order to ensure China meets this year's 5% economic growth target. Far more may be needed, though, to boost weak household demand and offset headwinds from abroad.

One foreign risk is Japan hiking interest rates to their highest level since 2008. Another is a US economy showing signs of strain as a contentious election approaches, with both Democrats and Republicans threatening new tariffs on all things Made in China.

Last week, PBOC Governor Pan Gongsheng unveiled a barrage of support measures, including a reduction in the seven-day reverse repurchase rate to 1.5% from 1.7%. The PBOC also cut loan prime rates and deposit rates and announced the largest-ever reduction in rates charged on its one-year policy loans.

The Politburo, Beijing's top decision-making body, called for a“forceful” implementation of these and other measures supposedly to come. It also highlighted a new urgency to make the real estate market“stop declining.”

Such efforts may include stripping away some remaining restrictions on home purchases. Top metropolises could remove curbs on non-local buyers. In other words, liberalizing China's“hukou” residence permit system.

Yet Beijing still hasn't detailed a clear timeline – or mechanism – for getting bad assets off the balance sheets of giant property developers to reduce their default risks. Or to prod local governments to buy up unfinished real estate projects without putting their already dire fiscal health in greater jeopardy.

Nor has Premier Xi Qiang's team made great strides in reducing the dominance of state-owned enterprises to make more market room for small and medium-sized private companies. And global investors still aren't clear on the state of Xi's crackdown on China's biggest tech companies.

Even on fiscal issues, Roach is among those concerned that last week's Politburo statement only“paid lip service to fiscal stimulus imperatives. These actions were framed more in terms of broad promises of what is to come rather than as a detailed set of measures to be announced.”

For example, Roach notes, while the Politburo pledged to stop the decline in the property market, policy actions in support of this objective were couched mainly in terms of cuts in mortgage rates, downpayment requirements for second homes and reduced interest rates on so-called social housing.

“There was a notable lack of detail in a long-awaited fiscal program to absorb the overhang of unsold homes and convert it into low-income public housing,” Roach cautions.

“Like Japan , where fiscal actions in the 1990s were repeatedly constrained by mounting public sector indebtedness, China remains wary of deploying the type of fiscal bazooka that was so effective in sparking its recovery in 2009-10. And perhaps that's with good reason,” he says.

Roach notes that the debt-to-gross domestic product ratio for the Chinese government was 85% in early 2024, nearly three times what it was back in 2009. That was the last time Beijing really turned on the stimulus machine, following the collapse of Lehman Brothers in the US.

It's imperative, though, that Team Xi do more to deal with investors' underlying concerns about China's financial system than just throw money at the problem, economists say.

Last week, the PBOC cheered stock punters by unveiling a new 500 billion yuan ($71 billion) swap facility that funds, securities firms and insurance companies can tap to buy equities. The facility could be increased to 1.5 trillion yuan ($214 billion).

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Beijing is also rolling out a lending facility for listed companies to buy back shares and raise holdings. It will start at 300 billion yuan ($42 billion) and possibly grow to 900 billion yuan ($128 billion). Some kind of market stabilization fund may also be in the works.

Last week, Wu Qing, the chairman of China Securities Regulatory Commission, said Beijing will roll out moves to encourage mergers and acquisitions.

With all that, there's little doubt the stimulus floodgates have been opened. As Goldman Sachs analysts wrote in a note:“We believe the persistent growth weakness has hit policymakers' pain threshold, and the policy put has been triggered.”

Yet to ensure the bull run endures, it's even more important that Team Xi couple stimulus with supply-side moves to strengthen China's investment environment for the longer run.

As Roach explains, comparisons with Japan are far from perfect.“There are many characteristics of China that are very different from those which led to Japan's multiple 'lost decades,'” he says.

“Other than being a large developing economy with several still untapped sources of future growth – namely,
household consumption, urbanization, and
insufficient capital endowment
of its large workforce – China also benefits from understanding the lessons of Japan.”

For now, Roach admits,“China's seemingly outsized policy stimulus took most of us by surprise.” He adds that“just when we had gotten used to Beijing's grudging reaction to increasingly serious economic problems, the financial authorities apparently came to the rescue with their own version of a 'big bazooka.'
At least that's the verdict of the Chinese equity market.”

Follow William Pesek on X at @WilliamPesek

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