After a day in which U.S.-listed Chinese stocks surged 33% and the Hang Seng Technology index posted its biggest single-day gain, a seasoned Asian investor in one of the world’s largest hedge funds called last Thursday to announce a turning point.
The scale of the rally was coveted and impressive, he said, but its driving force was a promise from the top of the Chinese Communist Party to introduce a series of “market-friendly policies” and immediate approval from other dignitaries. government bodies had huge consequences.
In his opinion, for the first time, in his opinion, the left and right hands of Chinese politics and market management were working together and signaling an important change in direction. He may be right. But the question is whether it matters much if the global economy is out of touch.
For an optimist, Wednesday’s announcement by Liu He, President Xi Jinping’s closest economic adviser, was reassuring. This meant that after last year’s violent clashes between the state and the stock market, an agreement had been reached between Xi’s “common prosperity” rhetoric and an acknowledgment that market confidence was both desirable and fragile.
This agreement seems to have come from Xi himself, and included some recognition that a continued glow around the world’s second-largest stock market could have political value in these turbulent times.
Technology stocks, led by Alibaba, rose the most on Liu’s list of market balms, partly because the sector has been hardest hit by China’s recent measures and partly because of the promise of an agreement between Beijing and Washington to regulate U.S.-listed Chinese companies. companies should value valuations more broadly.
A report from JPMorgan Chase last Monday swept into the maelstrom, downgrading more than two dozen well-known Chinese Internet stocks, describing the basket as “unattractive with no near-term valuation support.” The report caused laughter due to a rally held a few days later. Another theory is that the notoriety and negative tone of the report helped Beijing announce the floor sooner rather than later.
However, a number of factors counter the optimistic view of China’s actions. The JPMorgan note comes after an extremely difficult period for Chinese equities — an extended sell-off that saw valuations well below their February 2021 peak. The Russian invasion of Ukraine, and the associated geopolitical turmoil, meant that there were few visible brakes on the downward spiral. China’s actions in this context were not so much a grandiose change of mind as a kill switch that went off when politicians hit the pain threshold.
As traders note, Thursday’s rally was driven by hedge funds and pressure on short sellers. Only long money – foreign and domestic – has not yet made final bets. Compounding the hesitancy, the signal from Liu and the Financial Stability and Development Committee he chairs has been met with near-total silence from tech companies and other corporations. The market rally reflects the joy of a man who has been told that his bleak health condition is easily treatable; The reaction of the companies is more like “fool me once”.
However, there is a dynamic looming over it that Beijing cannot change. Though rare, self-confidence-boosting Chinese spasms are not unprecedented. They have parallels with successful experiments after the global financial crisis and after 2014, when panics were gripped by domestic growth or trade wars in the United States.
However, in previous cases, China’s confidence boosters have been used in markets where globalization still seemed fundamentally unstoppable and decoupling seemed an unlikely risk. Neither one nor the other can now be said with certainty.
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Even before the invasion of Ukraine fueled fears of deglobalization and division, tech nationalism, supply chain reshaping and other megatrends were re-evaluating the calculation of investing in Chinese equities. The uncertainty of Beijing’s position in relations with Moscow has not diminished. Xi’s remarks on Friday in a phone call with US President Joe Biden that the international community “must work for peace and tranquility” were superficially reassuring, but unlikely to address underlying disengagement concerns. Investor hesitancy about China still has many good justifications.
Beijing’s actions last week are important in neutralizing some of the more idiosyncratic domestic policy concerns that affect certain sectors of the stock market. But at the same time, the Chinese market remains a more direct indicator of investors’ opinions about the future of globalization.