Nicholas Spiro

Macroscope | Why rally in Chinese stocks is hardier than doubters think

Many investors believe the current rally in Chinese stocks is built on shaky foundations, but there are reasons to think this surge could last

Data beating expectations indicates a stabilising economy, markets seem convinced by Beijing’s policy moves and the rally is not disconnected from domestic fundamentals

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A shopper walks past food stalls at a night market in Nanning, China, on May 13. The Chinese economy is stabilising, which from a market standpoint is an important signal that the worst of the downturn is over. Photo: Bloomberg

Nicholas Spiro

Published: 4:30pm, 16 May 2024

The China trade is back. Since its low on January 22, the MSCI China Index, which tracks stocks listed at home and abroad, has risen 28 per cent after falling 35 per cent in the preceding year. Since the beginning of 2024, moreover, the index has outperformed both the benchmark S&P 500 gauge of global equities and a broader gauge of emerging market shares.

Bank of America notes that the “ABC”, or Anything But China, trade has “reversed big” in the past three months. According to data from Bloomberg, Chinese stocks have already recouped more than a third of the market value lost during a three-year-long meltdown that began in February 2021.

There have been several dramatic shifts in global markets over the past four months, not least of which is the rapid unravelling of bets that the US Federal Reserve will cut interest rates sharply this year. The most unexpected one by far, though, has been the bull market in Chinese equities.

In the latest Bank of America global fund manager survey, which was carried out earlier this month, a short, or underweight, position in Chinese stocks was still deemed by respondents to be one of the most popular trades in markets.

This partly explains why most investors believe the rally is built on shaky foundations and is unlikely to prove durable. The list of concerns about China is a long one. Chief among them are the cyclical and structural headwinds facing the economy, exacerbated by the crisis in the housing market.

While manufacturing activity expanded for a second straight month in April, producer prices continued to contract, squeezing companies’ profit margins and making them reluctant to invest. Industrial profits shrank in March, heightening concerns in Western economies about overcapacity and the dumping of cheap Chinese goods abroad. This has called into question the viability of a new growth model which is led by high-end manufacturing and reliant on exports.