About a month ago, we noted that a rebound in Chinese equities was unlikely without significant stimulus measures. True to that prediction, stimulus measures announced on 24 September 2024 led to an initial surge of over 25% in the MSCI China Index. However, the rally has since lost steam as doubts emerged about the adequacy of these measures. Doubts were raised when the National Development and Reform Commission (NDRC) failed to deliver new stimulus measures. Additionally, the Ministry of Finance (MOF) held a recent briefing but failed to provide specific details in terms of size and timing of additional fiscal stimulus, raising questions about the sustainability of China’s equity rally.
The absence of new measures so far can be attributed to several factors. Officials appear cautious in preventing excessive market exuberance, hoping to avoid past mistakes from the 2015 boom-bust cycle, where unchecked speculation led to sharp gains followed by a steep decline and subsequent government intervention. Around 3 million brokerage accounts were reportedly opened during China’s Golden Week holiday, signalling potential overexuberance. In addition, any budget revisions to fund new stimulus would require approval from the National People’s Congress (NPC) Standing Committee, which is set to convene around the end of October. More details on stimulus are likely to be revealed then.
The path of least resistance for Chinese equities remains to the upside, given that the government, in addition to standard macro tools, has unveiled measures to support the stock market. Liquidity will be provided via a CNY 500 billion swap facility for financial institutions and a CNY 300 billion refinancing facility to support buybacks, with the potential to increase if necessary. The scale of the buyback facility is large relative to historical terms. The CNY 300 billion buyback facility is already larger than any total annual buyback in history, highlighting the PBOC’s commitment in backstopping the equity market. Lastly, the valuation of Chinese equities remains attractive in spite of the recent bounce; MSCI China Index’s forward P/E is currently at 11x, closer to its decade-low of 9x and still far off its peak of 20x in 2021.
In conclusion, the prospect for additional fiscal stimulus, alongside the government’s proactive measures to support the stock market, provide compelling reasons for Chinese equities to trend higher. From an investment standpoint, market participants should remain invested in Chinese equities.
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The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 738 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.
