Chinese Market Blitzkrieg: Is it any different this time?

Chinese indices have been ripping higher the past 2 days. To put things in perspective, this is only the 2nd time in 2024 (and since Jan 2023) where we see the onshore indices post a bigger rally than the HSI.

1st Time (February 2024):CSI 300 was up by+10% while the HSI was up by only +7.7%

2nd Time (September 2024):CSI 300 up by+6.3% while the HSI was up by only +4.9%

So... what led to this sudden outperformance?

On 24th September morning, Asian markets and investors were taken by surprise following a series of announcements from the PBoC head, Pan Gongsheng, and two other top financial Chinese regulators during a 1.5 hour long news conference.

To keep it short, the changes that were proposed were the following:

It is a no-brainer that the announcements are a pure focus on propping up a sluggish stock market and economy that has been battered repeatedly since its peak back in February 2021. A reduction in short term interest rates and the RRR, is to encourage home owners to refinance their home loans at a lower rate and ideally free up much needed capital that could very well drive consumer spending with the run-off effect of promoting economic growth.

It is also as clear as day that the injection of money into the stock markets along with the idea of a stock stabilisation fund, is to help provide a floor for the stock markets. Since February 2021, using the CSI 300 index as a proxy, the Chinese stock markets have not seen prices print a "higher high", which is often a clear technical signal that markets are on route to recovery.

Finally, by encouraging more M&A deals alongside fresh IPO listings, this will send a strong signal to the markets that there are still investment opportunities in the Chinese markets. Further, these new listed companies are not run-of-the-mill companies without sound compliance as they will have to go through the new regulatory oversight process that has been strengthened. Ideally this should help boost investor confidence and promote healthy market competition across corporations.

Since the peak in 2021, following the pop of the property bubble in China along with the delay of a full post-Covid opening, the Chinese government have repeatedly tried to support the markets and economy through a series of stimulus. Below are some of the notable instances which were picked up in the media in chronological order (excluding the most recent ones):

July 2021: China’s central bank (PBOC) cut the Reserve Requirement Ratio (RRR) by 0.5%, releasing RMB 1 trillion ($179.6 billion) to boost liquidity and lending in response to a slowing economy due to trade tensions and pandemic impacts

December 2021: The PBOC announced another RRR cut of 0.5%, freeing up an additional RMB 1.2 trillion ($179.6 billion). This was part of a broader strategy to boost credit in response to weaker economic performance and to front-load stimulus for early 2022

March 2022: The PBOC transferred RMB 1 trillion ($149.6 billion) in profits to the government to help fund tax rebates and support businesses. Additionally, the Loan Prime Rate (LPR) was reduced to help alleviate costs for borrowers, particularly in the property sector

April 2022: The PBOC cut the RRR by a smaller 0.25%, releasing RMB 530 billion ($79.3 billion). This came alongside additional lending programs to target small businesses and specific sectors hit by the economic slowdown

Aug 2022: The PBOC cut the Loan Prime Rate (LPR) in a surprising move and also injected up to RMB 1 trillion of funds via state banks, local government special bonds and state owned power generation companies.

June 2023:PBOC cut its key lending benchmarks, or loan prime rates (LPR), for the first time in 10 months.

July 2023:China's top leaders, at a Politburo meeting, pledged to step up support for the economy, signalling more stimulus steps. Additionally also issued measures to boost consumption in the automobile, real estate and services sector, aiming to give full play to the "fundamental role" of consumption in economic development.

Aug 2023:The PBOC issued notices to ease some borrowing rules to aid homebuyers, including lowering the existing mortgage rate for first-home buyers and the down payment ratio in some cities.

And the list goes on... It seems that every couple of months, there would be some stimulus announcement that would try to boost investors' confidence and try to prop up the stock market. However, price action tells a very different story. Each stimulus announcement seems to only set the stage for yet another rally - lower.

I understand why some investors that I speak to say that the repeated stimulus package is increasingly like the story of the "Boy who cried wolf". It gets tougher and tougher to believe that any sort of stimulus would help after years of repeatedly trying. As often attributed to Albert Einstein:

While I would argue that it is possible to expect different results provided the lessons from previous experiences are learnt and built upon. According to multiple sources like World Bank, Statista and IMF, the size of China's economy at the end of 2023 is valued at approximately USD$17.7 trillion and expected to reach USD$27.5 trillion by 2028. Further, the Chinese stock market alone is estimated to be valued at USD$6 trillion. Do investors really think that even if there was a stimulus of USD$100 billion, this amount will be able to take the Chinese markets from its current low to a fresh new high? I personally think it's too little. A USD$100 billion stimulus is only approximately 1.67% of the stock market.

Do not be too negative! Just because the stimulus may not mean much for the stock markets, it does not mean that there are no investing opportunities lying around for investors. To paraphrase a famous quote:

A simple framework that I would like to share with you:

1. NEVER chase the trade. A hunter always lies in wait for the right time before striking. Remember, the 2nd mouse almost always gets the cheese. Yes the markets may be rallying now. But that does not mean you should blindly invest.

2. Understand how the broad market is expected to move first before looking at individual stock oppurtunities.

Wait for the weekly price to close above 19780 resistance. This will be a sign that we are now seeing a bullish breakout. From here, I expect price to push higher towards 1st resistance at 21060 then finally a further recovery towards 2nd resistance at 22670. As long as price holds above 16930 support, this cautious bullish recovery scenario remains valid.

As for individual stocks, I will recommend a mix of stocks from the following sectors with a medium term outlook (1-3 months):

Despite the stimulus, price is telling us a very different story here. CSI 300 index is still very much holding below a long term descending trendline resistance that formed since mid-2022. Technical indicators are also bearish as well. Only a weekly close above 3545.50 resistance will confirm further recovery towards next resistance at 3820. Key support remains at 3108.30. If price closes below this support, then we will see further weakness towards next support at 2780.

As for individual stocks, given that the broad index is showing a more mixed outlook, I would prefer to stay away from onshore shares for now. However, if I were to pick, I would definitely choose the stalwarts which the government is focused on protecting right now, such as:

The two strongest emotions in the market which dictate prices, the start and end of trends would be greed and fear. Right now, the recently announced stimulus package is not doing enough to calm investors fears and there is still a sense of caution judging by the different price action from both the HSI and CSI300.

Until there comes a time where the stimulus package is big enough to actually boost the confidence of investors, I would advice you to take this current rally with a sense of cautious optimism. As the legendary investor Warren Buffett famously quotes:

Happy investing and as always, stay safe, trade safe my friends.

Prepared by:

Isaac Lim CMT, CFTe
Chief Market Strategist

This report is provided for informational and general circulation purposes only and should not be construed as an offer, solicitation, or recommendation for the purchase or sale of securities, futures, or other investment products. It does not take into consideration any particular needs of any person. This advertisement has not been reviewed by the Monetary Authority of Singapore.