A stunning reversal in Chinese stocks from world’s worst to best performers is stoking cautious optimism that the rally will continue as long as favourable market policies remain in place.

Rarely has a week has gone by in 2024 without Beijing unleashing new measures to buttress the market or the economy. That policy resolve has pushed an index of Chinese shares listed in Hong Kong up more than 10 per cent this month, topping the 90-strong list of major global equity gauges. The CSI 300 Index of onshore shares has risen for nine days, its longest winning run since 2018. 

With State funds seen drumming up the market while the economy faces persistent headwinds, the rally may well be on borrowed time. Yet with depressed valuations and light positioning among global and local money managers, investors see a rare window to boost returns from the battered market. 

“The pain threshold for authorities has been reached,” said Arthur Budaghyan, chief emerging markets strategist at BCA Research. “We’ve reached oversold conditions and policy reaction is much more aggressive. So I would expect more tactical upside from current levels.” 

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The current mood marks a rapid shift from last month, when the Hang Seng China Enterprises Index was the world’s worst performer. The CSI 300 sank to a five-year low on February 2 as a blow-up in snowball derivatives and margin call fears intensified bearish sentiment.

The gloom has slowly faded since as a steady stream of policy support measures showed Beijing is determined to end the rout. 

State funds have ratcheted up share purchases, seemingly broadening their target to include small caps. There’s been a clampdown on quantitative trading while the China Securities Regulatory Commission, led by newly appointed Chairman Wu Qing, has banned major institutional investors from reducing equity holdings at the open and close of each trading day, according to Bloomberg’s report. 

Meanwhile, support for the real economy has also been beefed up with a key mortgage reference rate slashed and funding for developers boosted. The list goes on. 

After a record six month of overseas outflows, mainland shares have lured more than 31 billion yuan ($4.2 billion) of inflows via the trading links with Hong Kong this month. The number though may have been boosted due to purchases by offshore accounts of Chinese state-owned enterprises. Margin debt balance has also ticked up this week in a sign of improving sentiment. 

“Many investors have been underweight China and need to quickly reconsider their positioning,” said Karine Hirn, partner at East Capital Asset Management. “A few positive days hurt a lot, when there are wild moves.”

Retrained Optimism 

While all of this may build the case for a strong bull run, investors are well aware of the vagaries of the Chinese stock market — hence the restrained optimism.  

Even after the sharp upswing, major equity benchmarks are down 40 per cent to 50 per cent from their peaks in 2021 — a level few market watchers expect to be reclaimed any time soon.  

The measures that authorities have used to prop up stocks this time around are reminiscent of the tactics deployed in the 2015 rout. Back then, the playbook failed to engineer a V-shaped recovery and it took months for the market to eventually bottom out.

A lack of remedies to cure the property market slump and end deflationary pressure, along with Beijing’s tightening grip on the private sector, will likely continue to keep long-term investors — an important source of market stability — away. 

“I don’t think it’s a widely participated rebound” among longer-term investors, said Vivian Lin Thurston, a portfolio manager at William Blair Investment Management. “We still need more meaningful, effective policies to come through,” she said, adding that “we’re not there yet.”  

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With much focus on the National People’s Congress due in the coming weeks and the nation’s economic growth target, any disappointing policy signals may kick off another downturn.  

Bearing that caution in mind, however, investors are saying cheap valuations and rising stock buybacks by companies add to the allure. The MSCI China Index is trading at 8.9 times forward earnings estimates, below its five-year average of 11.9 and emerging market peers’ reading of above 12.  

It would not be surprising “if China stocks staged a bit more of a rally here,” Chris Wood, global head of equity strategy at Jefferies Financial Group Inc., wrote in a note this week. “For those investors who have conviction on particular bottom-up stories, it makes sense to add here since stocks are clearly cheap.” 

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