China: investors’ coming and going?

Marco Mencini, Head of Research Plenisfer Investments SGR.

During the monthly meeting of the Politburo of the Chinese Communist Party at the end of September, the government announced its intention to introduce new substantial fiscal measures. 

The aim is to support consumption and investments to achieve the 5% GDP growth target announced at the beginning of the year* that now seems a long way off.

This marks a significant shift for China.In our opinion, over the past three years only "buffer" measures have been implemented. Those measures have not had a significant impact on the economy, still struggling with the aftermath of the bursting of the property bubble, which has led to growing consumer and business distrust. Now the government seems to have acknowledged the existence of "new problems" and has put a lot on the table in terms of monetary policy, while it seems intent on doing the same on the fiscal front.

The announcement of significant fiscal stimuli—the details of which are still unknown—comes shortly after the monetary policy announcements. The measures include cuts on interbank rates and on the thresholds related to bank reserves—thereby increasing the capital available for loans—as well as 150 basis point reduction in mortgage rates, aimed at supporting the real estate sector and internal consumption. These measures are accompanied by others, such as the removal of certain restrictions on property purchases imposed in recent years to curb real estate speculation.

According to Bloomberg, is also under consideration a massive injection of over 140 billion dollars into large state-owned banks whose balance sheets are weighed down by real estate losses.

These are certainly significant measures, but although they are pro-cyclical, monetary policies are never structural. Fiscal policy is the most powerful economic tool. Now all eyes are on the details of the rumoured reform, which is expected to be unveiled by the end of October.

China back in the spotlight

The newly announced measures have suddenly put China back in the market spotlight. We have seen a rally in Chinese equity indices (+9.5%* from 27 September to 4 October), with the MSCI China up a substantial +30% from mid-September to 4 October. This rally positions China as the best performing market since the beginning of the year (+34%).

Is the market’s enthusiasm justified?

It will be necessary to examine the details of the fiscal measures to assess their real impact. It will take time to see whether the new course that the government seems determined to pursue will restore the lost confidence of citizens and businesses.

We also think it will be important to monitor the "local government" factor. Their coffers appear to be increasingly empty: revenues from land sales for property development are now a thing of the past, and tax revenues are well below previous levels. Scarce resources are combined with the inertia of the administrative apparatus, which has been weakened by the process of control and centralisation initiated by the government. However, this apparatus is essential for the implementation of the new measures that have been announced. Only if these measures are effectively implemented will they be able to fuel new confidence among businesses and consumers.

One thing is certain: the first step on a new, difficult reform path has been taken.Inv estors seems to be returning to the market after more than two years during which China was generally considered un-investable.

Some figures: of the $700 billion invested in equity ETFs in 2024, only $5 billion has flowed into emerging markets. Until two weeks ago, there was an YTD outflow of around $3 billion from China*. The flight of investors from the Chinese market led to a collapse in equity valuations across all sectors, including technology: before the rally of the past two weeks, major Chinese tech companies were trading at 5-6x earnings, compared with 30 or 40x for their US counterparts*.

Whether the recent rally will remain a short-lived burst or become the start of a return of investors to the country will depend, as mentioned, on the actual impact of the fiscal measures and the concrete actions that will be taken. In any case, it is important to consider one key element: in China, we see companies that have remained strong and profitable regardless of the economic cycle. If the economy rebounds more decisively, it could provide a powerful boost to their further growth.

But it is worth remembering that China has grown steadily, tripling the size of its economy in 20 years*: the 5% growth target for 2024 may not be achieved, and we will have to get used to much lower growth rates than in the past, likely around 3%.

Nevertheless, China remains the world's second largest economy and still accounts for a third of the world's manufacturing capacity, although its production model has changed. China  is no longer the world's factory but a centre for the invention and development of new technologies and quality products, as demonstrated by the rise of local electric vehicles, which now dominate the Chinese market at the expense of European, especially German, cars.

There are select companies in China with resilient business models that have grown even during these three complex years. There are strategic industries for China's new growth model, such as technology, automotive and semiconductors.

In particular, the tech sector three years ago was under pressure from the government through regulatory tightening. Today, the interests and priorities of the sector and the government—namely economic growth and technological development—seem to have realigned. A sign of this is the closure of the Alibaba investigations, which resulted in only minor interventions for the company.

After years of darkness, technology could now see the light again. Moreover, the monetisation of solutions such as cloud and AI, already well underway in the US, has yet to be largely realised in China.

Overall, despite the recent sharp rebound in valuations, at Plenisfer we believe that the fundamentals of companies in the sector are far superior to current valuations. More generally, we believe that there are many opportunities in the country that can be identified through in-depth research and careful stock-picking.

*Source: Bloomberg

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