China’s Shanghai Composite Stock Index ($CHSC) rallied by more than +2% today to a 1-week high as market sentiment improved after this week’s Politburo meeting laid out a pre-growth tone that was more dovish than markets expected. The Chinese Communist Party’s 24-member Politburo, the country’s top decision-making body led by President Xi Jinping, promised “counter-cyclical” policies, which spurred a widespread rally from property stocks to tech and retailers.
The big question is whether the follow-through from government authorities' plans to boost growth will lead to a sustainable stock rally. Brief bursts of optimism previously sparked small gains in Chinese equities as the country emerged from strict Covid restrictions. However, stocks fell back as the recovery faltered after the markets were disappointed by a lack of forceful action taken by authorities to spur growth. Fidelity International said, “Clearly, markets have been disappointed as they anticipated more rapid improvements but are beginning to rationalize their growth expectations. Our view is that this somewhat unexciting period will eventually give way to a more positive market tone.”
Today’s rally in China’s Shanghai Composite was widespread, with gains from property stocks to retailers. The Politburo’s language on the property sector, which accounts for up to 20% of China’s GDP once related sectors are added, fueled gains in property stocks after the Politburo signaled an “adjustment” of restrictions in the property sector and to “adjust and optimize property policies timely.” Malayan Banking Bhd said, “These acknowledgments were important and possibly sufficient for markets to breathe a sigh of relief, even though we probably need to wait a while for concrete measures to come through.”
With the statement from the Communist Party’s 24-member Politburo short on specifics, some analysts remain skeptical that this time will be any different. Leuthold Group said, “We have seen this movie before. The latest policy signal from the Politburo is not surprising, considering the credit/liquidity crunch Chinese property companies are currently facing.” Citigroup wrote Monday that investor positioning has turned increasingly negative for Chinese shares onshore and is the most bearish across the indexes they track.
The markets may be unconvinced that a rally in Chinese stocks can be sustainable until the economy improves. Last week’s reports showed the Chinese economy lost momentum in Q2, with consumer spending weakening and property investment contracting. Also, China’s home sales in June declined, ending a four-month rebound. Concerns are that today’s stock rally may have just been short covering and is not sustainable. Saxo Capital Markets HK Ltd said, “Now we got the Politburo, and it was not that bad, a bit lukewarm but enough to draw some investors back to the market and have some traders closing shorts.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
