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China’s Market Rally: a Golden Opportunity or a Risky Trap?

AInvestFriday, Oct 11, 2024 8:38 am ET
2min read

The Chinese stock market has recently grabbed significant attention. Since late September, the CSI 300 Index has surged by over 30%, fueled by a government stimulus package aimed at restoring economic confidence. However, the rally began to lose steam this week, as investors started to question the effectiveness of the government’s plans to boost the economy and its capital markets. By Friday, the CSI 300 Index closed 2.8% lower, marking its worst performance since late July. Meanwhile, investors are starting to show renewed interest in China’s corporate bond market.

According to a trader note from Goldman Sachs, hedge funds sold a record amount of Chinese shares on Tuesday after the market reopened from a weeklong holiday, which saw little in the way of major new stimulus measures. These funds not only liquidated their long positions but also added new short positions, with the volume of long sells being double that of short sells. This signals a bearish outlook on Chinese equities among hedge funds.

Should Investors Count on a Major Stimulus from Beijing?

There is growing speculation about whether Beijing will introduce a significant fiscal stimulus package. A majority of the 23 market participants surveyed by Bloomberg expect the Chinese government to inject as much as $283 billion in fresh stimulus. This would be part of efforts to support the world’s second-largest economy and restore market confidence. The theme of a recent government conference centered on "intensifying countercyclical fiscal policy adjustments to promote high-quality economic development."

However, some analysts believe Beijing’s hesitation to implement more aggressive measures may reflect concerns about conserving resources for a potentially larger stimulus in the event that Donald Trump wins the upcoming U.S. presidential election, which could lead to higher tariffs on Chinese exports.

One private equity fund manager in Hangzhou mentioned, "I would only increase my investments after seeing new promises from the Ministry of Finance regarding more stimulus or improvements in high-frequency data in October."

China’s Stock Market Still Holds Some attraction

Despite the recent volatility, some experts see long-term potential in China’s stock market. Beeneet Kothari, CEO of U.S.-based hedge fund Tekne Capital, pointed out that around $12 trillion in household deposits are currently stuck in low-yield money market funds in China. He believes ongoing reforms in the capital markets and the restructuring of the real estate sector will drive a reallocation of household assets into equities. According to Kothari, this shift could bring a significant inflow of funds into China’s stock market, equivalent to more than 350% of the current free-float market cap of A-shares.

Jeff deGraaf, co-founder and CEO of Renaissance Macro Research, also forecasts a bright future for the CSI 300 Index, predicting it will rise to 6,000 points within the next 12 months, representing an over 50% increase. He cites factors such as skepticism, valuation, stimulus, and momentum as reasons for his optimistic outlook.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.