China stocks roar back after grim 2018

Chinese stocks have staged a resurgence this year, stoked by stimulus unleashed by China’s central bank and a dovish US Federal Reserve, in a sharp reversal of its performance last year as the world’s worst equity market.

The CSI 300 index of companies listed in Shanghai and Shenzhen crashed firmly into bear market territory in 2018, tumbling 26 per cent. But the index has roared back to rank among the world’s top performers this year, jumping 10.9 per cent year-to-date.

The substantial rebound comes after Jay Powell, chairman of the US Fed, executed a surprise U-turn at the end of last month when he opened the door to cutting interest rates this year. The dovish move was followed by other central banks globally, giving a boost to China and other emerging markets.

The switch in tone came against a backdrop of global geopolitical tension, with uncertainty hanging over Brexit and the US-China trade war.

US and Chinese negotiators held a second day of meetings in Beijing on Friday, but the impasse is raising pressure on US president Donald Trump to postpone a rise in tariffs due to take effect at the start of March. Concern over the outcome of the negotiations dented Chinese stocks on Friday, with the CSI 300 down almost 2 per cent.

The weaker US dollar as a result of the Fed’s more dovish tone has supported China and emerging market assets, said Eric Bian, a fund manager at JPMorgan Asset Management. “The strong rally this year has also come from the more positive tone of the China-US negotiations [and] that has helped market sentiment to a certain extent,” he added.

“Any type of tariff delay is beneficial for China, as it simply means you don’t have to pay the tax,” said Ben Luk, a global macro strategist at State Street Global Markets. “This year, expectations of an ongoing trade war have been built in; people know that this is going to be a longer term issue. And now valuations are much cheaper, so relative to the US, China is very attractive.”

Such low valuations helped spur foreign investors to channel a record $9bn into Chinese equities in January, the largest single-month inflow on record. Global index provider MSCI, meanwhile, is expected to lift the proportion of Chinese stocks that will be included in its flagship Emerging Markets benchmark — a move that should attract further inflows.

Investor sentiment has also been buoyed by recent stimulus measures unveiled by the People’s Bank of China, and expectations that Beijing will step up momentum in the next few months.

Chinese authorities have cut taxes and the central bank last year took action to improve liquidity and lending to private enterprises, lowering the amount of cash reserves banks must hold.

Official data released by China’s central bank this week showed new renminbi loans by domestic banks jumped to Rmb3.23tn ($476.6bn) in January, the highest level on record. While policymakers in Beijing often seek to build up a liquidity buffer in January ahead of the lunar new year, when cash demand is high, last month’s loan growth outstripped analyst expectations by more than Rmb400bn.

Inflation data on Friday suggested flagging price rises might be pressuring policymakers to turn on the taps in the face of weaker demand. China’s factory gate prices rose just 0.1 per cent in January, while consumer prices grew at the slowest pace in more than a year.

The central bank is also working on draft rules that would allow it to channel funding directly to private enterprises, and to ensure commercial banks focus more on lending to the private sector, rather than state-owned businesses.

The stimulus measures and lending initiatives have helped financial stocks become one of the best performing sectors this year. “Although it’s been a broad-based rally, the sectors that have moved the index the most are banks and insurance companies,” said Mr Luk. “If you’re geared towards a fiscal push and policymakers are supporting the real economy . . . then people will turn to the banks for loans.”

Hong Kong-listed companies have also bounced back this year, up by about 8 per cent after falling by 15 per cent in 2018. Banks, pharmaceuticals and property stocks have led the resurgence.

Asia’s technology giants came under pressure last year, in part because the trade war knocked sentiment, but also because of sector-specific headwinds. Tencent, the largest stock in the Hang Seng index, had a tough time after the gaming industry regulator froze new licences on games last year. Its share price fell by more than a fifth last year.

Investors expect the current bounce in Chinese equities to continue. “We are positive on China equities in the long term,” said Mr Bian of JPMorgan Asset Management. “We prefer China’s onshore markets due to the valuation, which is still very attractive.”

Additional reporting by Hudson Lockett