On September 24, China announced its largest economic stimulus package since pandemic, triggering a frenzy in AH shares and US-listed Chinese stocks. Chinese stocks listed in the US soared on Tuesday, with the  $NASDAQ Golden Dragon China (.HXC.US)$ closing up more than 9%, marking the biggest gain since 2022. Among the popular stocks,  $Kanzhun (BZ.US)$ surged over 19%,  $Bilibili (BILI.US)$ rose by 17%,  $JD.com (JD.US)$ by nearly 14%, while  $XPeng (XPEV.US)$,  $NIO Inc (NIO.US)$,  $Li Auto (LI.US)$, and  $PDD Holdings (PDD.US)$ all rose by more than 11%.

In the options market, the trading volume of bullish options on China-related assets also saw a sharp increase, indicating a surge in optimism among global investors towards Chinese stocks.

Beijing's Extensive Policy Measures Fuel Market Confidence

The People's Bank of China has recently unveiled a comprehensive package of policies to the market, including:

1. The rare simultaneous reduction in the reserve requirement ratio and policy interest rates: On one hand, it announced a 50 bp cut in the bank reserve requirement ratio and provided unconventional guidance on the possibility of further cuts of 25-50 bp before the year-end; on the other hand, it declared a 20 basis point decrease in the key short-term interest rate - the 7-day reverse repo rate, driving down the market benchmark interest rate.

2. Lowering the interest rates on existing housing loans and standardizing the minimum down payment ratio for housing loans, which is expected to reduce residential interest pressure, unleash consumer consumption potential, and stimulate real estate demand.

3. For the stock market, two new instruments have been introduced to support the stock market: including establishing a swap program for securities, funds and insurance companies to obtain liquidity from the central bank through asset collateralization, significantly enhancing funding and stock holding capabilities; at the same time, the introduction of special re-lending facilities to guide banks in providing loans to listed companies and major shareholders, supporting buybacks and stock holdings. In terms of the initial scale, these two instruments are expected to bring about an incremental funding of around 800 billion RMB, injecting liquidity into the Chinese stock market.

Lynn Song, ING's Chief Economist for China said:

"We view the measures announced today as a positive move, particularly due to the simultaneous release of multiple policies instead of gradual implementation. We believe that there is still room for further relaxation in the coming months, especially with the majority of global central banks currently following a rate-cutting path."

The unexpectedly comprehensive policy measures demonstrate Beijing's determination to combat deflation, economic slowdown, and low investor confidence, with the potential to boost consumer spending, alleviate pressure on the real estate sector, stabilize domestic demand, and inject new vitality into the economy. Simultaneously, it aims to improve market risk appetite for Chinese assets, attracting a new wave of incremental capital inflows. Currently, foreign capital's allocation to Chinese assets remains relatively low. With the return of confidence and liquidity, undervalued Chinese concept stocks with strong fundamentals are expected to usher in a new chapter.

According to Morgan Stanley's stock strategist Laura Wang,

"We anticipate that both the domestic A-share market and the offshore market will respond positively to these measures, potentially leading to a tactical rebound rally and even outperforming the emerging markets in the short term."

How to Allocate Assets and Capitalize on China Assets' Rebound?

For investors who are optimistic about the broad valuation recovery of Chinese assets driven by the current round of policies, investing in related ETFs may be a relatively straightforward choice.

For investors who are still cautious about the effects of the policies and anticipate differentiation in the performance of Chinese concept stocks, selective sector and stock picking are necessary. Investors can focus on targets with strong profitability, ample cash flow, stable stock buybacks or dividends, and good expectations of future performance growth. In terms of industries, analysts are paying close attention to sectors such as banking and insurance, consumer goods, and internet technology.

Additionally, as a significant global consumer of oil and the largest consumer of mineral resources, China's stimulus measures have also strongly boosted commodity prices and cyclical sectors such as metals and mining, which are highly sensitive to Chinese demand. On Tuesday, both WTI and Brent crude oil prices rose nearly 3% intraday, with major metal price increases driving mining stocks to lead the gains, with the S&P Metals & Mining Select Industry Index rising by 4.12%.

Luxury stocks also saw a collective rise, with the S&P Global Luxury Index up by 2.41%, outperforming the $S&P 500 Index (.SPX.US)$'s 0.25%.

It is worth noting that despite the significant rebound in the short term driven by the positive signals from the policy measures, some analysts still harbor doubts about the effects of this round of policies. Major institutions such as Goldman Sachs and Morgan Stanley believe that loose monetary policy needs to be combined with more robust fiscal policies to effectively stimulate domestic demand. HSBC also views the current loose policy combination as the starting point for further measures, expecting more fiscal stimulus measures in the future, including the issuance of special national bonds, to ensure economic growth returns to a positive trajectory. It will be crucial to closely monitor data supporting macroeconomic stabilization in sectors such as manufacturing, consumption, and real estate, as well as more evidence of improved corporate profitability.

Source: Bloomberg, The People's Bank of China