The Big China Long?
China's central bank on Friday lowered interest rates and injected liquidity into the banking system as Beijing assembled a last-ditch stimulus assault to pull economic growth back towards this year's roughly 5% target.
More fiscal measures are expected to be announced before China's week-long holidays starting on Oct. 1, after a meeting of the Communist Party's top leaders showed an increased sense of urgency about mounting economic headwinds.Reuters reported on Friday, citing sources, that megacities Shanghai and Shenzhen are planning to lift key home purchase restrictions in coming weeks, joining a long list of smaller cities that have done so to ease a years-long property crisis.On the heels of the Politburo huddle, China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of fresh fiscal stimulus, two sources with knowledge of the matter have told Reuters.Capital Economics chief Asia Economist Mark Williams estimates the package "would lift annual output by 0.4% relative to what it would otherwise have been.""It's late in the year, but a new package of this size that was implemented soon should be enough to deliver growth in line with the 'around 5%' target," he said.Chinese stocks are on track for the best week since 2008 on stimulus expectations.The world's second-largest economy faces strong deflationary pressures due to a sharp property market downturn and frail consumer confidence, which have exposed its over-reliance on exports in an increasingly tense global trade environment.A wide range of economic data in recent months has missed forecasts, raising concerns among economists that the growth target was at risk and that a longer-term structural slowdown could be in play.On Friday, data showed industrial profits swinging back to a sharp contraction in August."We believe the persistent growth weakness has hit policymakers' pain threshold," Goldman Sachs analysts said in a note.As flagged on Tuesday by Governor Pan Gongsheng, the People's Bank of China on Friday trimmed the amount of cash that banks must hold as reserves, known as the reserve requirement ratio (RRR), by 50 basis points.This will release 1 trillion yuan ($142.5 billion) in liquidity into the banking system and was accompanied by a cut in the benchmark interest rate on seven-day reverse repurchase agreements by 20 bps to 1.50%.
The cuts take effect on Friday and Pan, in rare forward-looking remarks, left the door open to another RRR reduction later this year.FISCAL OOMPH
Given weak credit demand from households and businesses, investors are more focused on the fiscal measures that are widely expected to be announced in coming days.Reuters reported on Thursday that 1 trillion yuan due to be raised via special bonds will be used to increase subsidies for a consumer goods replacement programme and for business equipment upgrades.
They will also be used to provide a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children, excluding the first child.China aims to raise another 1 trillion yuan via a separate special debt issuance to help local governments tackle their debt problems.Bloomberg News reported on Thursday that China is also considering injecting up to 1 trillion yuan of capital into its biggest state banks.Most of China's fiscal stimulus still goes into investment, but returns are dwindling and the spending has saddled local governments with $13 trillion in debt.The looming fiscal measures would mark a shift towards stimulating consumption, a direction Beijing has said for more than a decade that it wants to take but has made little progress on.China's household spending is less than 40% of annual economic output, some 20 percentage points below the global average. Investment, by comparison, is 20 points above and has been fuelling more debt than growth.The politburo also pledged to stabilise the troubled real estate market, saying the government should expand a white list of housing projects that can receive further financing and revitalise idle land.Shanghai and Shenzhen are seeking to scrap limits on the number of homes that Chinese can buy, Reuters reported. Beijing is also considering lifting similar restrictions across most areas of the city, but more gradually.The September meeting is not usually a forum for discussing the economy, which suggests growing anxiety among officials."We get a sense of urgency from the latest Politburo meeting, suggesting that China's top leadership has become increasingly wary of the current economic situation," BNP Paribas said in a note.
Bloomberg News reports China’s biggest stock buying frenzy in years overwhelms exchange:
Chinese equities capped their biggest weekly rally since 2008 with a burst of trading that overwhelmed the Shanghai stock exchange, underscoring a dramatic shift in investor sentiment after Xi Jinping’s government ramped up economic stimulus.
In an echo of the rally that followed China’s massive stimulus during the global financial crisis, the CSI 300 Index of large-cap shares soared 4.5% on Friday — bringing this week’s gain to 16%. Trading activity was so intense that it led to glitches and delays in processing orders, according to people familiar with the matter. The Shanghai exchange said it was investigating the issues, without elaborating.
It was a frenzied end to a week that has raised hopes of a bottom in China’s $8.9 trillion stock market after years of losses that made it one of the world’s worst performers. Chinese authorities unleashed a long hoped-for barrage of monetary stimulus on Tuesday, followed by vows from top leaders to do what’s necessary to shore up the housing market and boost consumption.
While many details of China’s stimulus plan remain unclear and past bouts of euphoria have often fizzled, market watchers say the fear of missing out on a sustained rally is palpable. With China’s markets closed next week for the Golden Week holidays, domestic investors may be worried that the rally could continue in Hong Kong while they’re away, said David Chao, a strategist at Invesco Asset Management.
“FOMO is running high for investors as Chinese equities have moved close to 10% in the past three days,” he said. “Based on historical valuation, we think Chinese stocks have another 20% runway to go.”
A gauge of Chinese stocks in Hong Kong climbed 3%, notching its longest winning streak since 2018. The ChiNext index, a tech-heavy gauge, rose a record 10%. Turnover in the mainland topped 1.4 trillion yuan ($200 billion), to reach the highest in three years, despite the trading issues. Turnover in Hong Kong reached 445 billion Hong Kong Dollars ($57.2 billion), the highest on record. Meanwhile, Chinese companies listed in the US were poised to extend gains at the open as they rallied in premarket trading on Friday.
As investors turned to risk assets over havens, China’s ultra-long government bond futures saw their biggest daily loss on record Friday. China’s 10-year bond yield rose 5 basis points at 2.16%.
The rally also severely hit a number of quantitative hedge funds in China, people familiar with the matter said. Some firms suffered losses because they shorted index futures for their so-called Direct Market Access strategies, said the people, asking not to be identified discussing a private matter. In some cases, the losses were exacerbated by the exchange glitch that left them unable to sell holdings to meet margin requirements, another person said.
Chinese authorities’ shift this week drove billionaire investor David Tepper to declare that he’s buying more of “everything” related to the country. “I thought that what the Fed did last week would lead to China easing, and I didn’t know that they were going to bring out the big guns like they did,” he said in a CNBC interview Thursday. “We got a little bit longer, more Chinese stocks.”
The securities regulator’s guidelines to encourage companies to attract long-term investors also fortified the optimism already brewing in the market.
The broad rally Friday was underscored by 266 of the CSI 300 Index’s 300 members ending the day in the green, with spirits maker Kweichow Moutai Co. and battery producer Contemporary Amperex Technology Co. leading the surge.
But Chinese bank stocks bucked the rally and fell, as investors weighed the implications of a 1 trillion yuan ($142 billion) capital injection plan reported by Bloomberg News. China is planning to inject funds mainly raised from the issuance of new special sovereign bonds, the report said, citing people familiar with the matter.
The injection plan could lead to a 56 basis point dilution of return on equity, JPMorgan analysts including Katherine Lei wrote in a note. The slump may also a reflect a shift away from sectors that were viewed as more resilient when the market was falling; with some of the nation’s highest dividend yields, Chinese banks have appealed to investors looking for stable returns.
Some investors are looking for signs of more fiscal stimulus to drive the next leg of gains. “We can expect fiscal measures as well to come,” said Raymond Chen, a fund manager at ZiZhou Investment Asset Management. “This is for sure leaving many cynics behind.”
Morgan Stanley is among a slew of China watchers gradually turning bullish, with strategist Laura Wang and her colleagues seeing another 10% upside for the CSI 300 Index in the short term. Just days earlier, the Wall Street bank removed its preference for onshore stocks over offshore counterparts, citing a lack of supportive factors such as state buying.
The optimism also drove higher other Asian stocks with exposure to the world’s second-biggest economy as the risk-on mood intensified across the region.
Last week was all about the Fed hiking rates by 50 basis points, which in my opinion won't stop a jumbo recession.
This week, it's all about China unleashing a barrage of fiscal and monetary policies to spur sagging growth.
A lot of hedge funds were betting big on these measures, including David Tepper's Appaloosa Management.
In an interview with CNBC Thursday, Tepper that following China's massive stimulus effort announced Tuesday, it's time to buy "everything" in China:
Tepper, who earlier this year doubled his stake in e-commerce giant Alibaba Group (BABA), Chinese ISP Baidu (BIDU), and online agriculture retailer PDD Holdings (PDD), also owns the Carolina Panthers.
The renowned investor said he favored many large Chinese companies because they had "single-digit [price-to-earnings] multiples with double-digit growth." Tepper added that Beijing's push to allow stock buybacks also made them attractive.
Tepper said he'd made a similar call in 2010, a period that followed huge growth in Chinese stocks before a crackdown by Beijing on its tech giants and the country's slowing economy started a downward spiral in shares.
Bank of America Sees Fiscal Measures Coming in Next Few Weeks
Still, most economists and analysts were disappointed with Tuesday's swath of measures, noting that a big fiscal push rather than monetary measures is what's needed to boost the country’s weak domestic demand levels.
In a note Wednesday, Bank of America analysts said they expect China to announce a fiscal package in the coming weeks, including "demand-boosting stimulus on consumption and investment, as well as further enhancement of social security, healthcare, and pro-birth measures."
Tepper wasn't the only one who was long Chinese shares.
Mathew Fox of Business Insider reports 'Big Short' investor Michael Burry bet half of his portfolio on Chinese stocks and it's finally starting to pay off:
The surge in Chinese stocks this week should be music to the ears of hedge fund manager Michael Burry of "The Big Short" fame.
Burry began aggressively buying Chinese stocks in the fourth quarter of 2022, and it seems to finally be paying off.
According to 13F filings, Burry's Scion Asset Management, which manages about $200 million, has about half of its portfolio invested in Chinese tech giants.
Burry counts Alibaba at his largest position at 21% of the portfolio, and he was still buying the stock as recently as the second quarter, boosting his stake by 24%.
Burry also has 12% of his portfolio invested in Baidu, and another 12% of his portfolio invested in JD.com. Altogether, Burry had about 46% of his portfolio invested in the three Chinese stock as of June 30.
All three stocks have surged this week after China got serious about announcing stimulus plans to revitalize its struggling economy.
The People's Bank of China announce key interest rate cuts, lowered bank reserve requirements to stimulate lending, and said it plans liquidity support for the stock market.
The country also encouraged its companies to start buying back stock.
All of these measures and dovish speak from policymakers led to a massive surge in China's stock market this week.
The iShares MSCI China ETF is up 18% so far this week. Meanwhile, shares of Alibaba, Baidu, and JD.com are up 19%, 18%, and 32% so far this week, respectively.
According to data from HedgeFollow, which tracks and compiles data from 13F filings, the recent gains in China's stock market should mean Burry too is seeing some sizable gains in his portfolio, with Alibaba leading the charge.
HedgeFollow estimates that Burry has an average cost per share of $78.83 for his Alibaba stake. Shares of Alibaba hit $105.25 in Thursday afternoon trades, representing an estimated gain of 34%.
This assumes that Burry has not sold any shares since Scion's last 13F filing, which offers data as of June 30.
Burry isn't the only hedge fund manager making money off of the recent surge in China's stock market.
Billionaire investor David Tepper said on Thursday that it's a buy "everything" moment for Chinese stocks.
Like Burry, Tepper count Alibaba as his hedge fund's largest position, making up about 12% of his $6.2 billion Appaloosa fund. Tepper believes there's more upside to be had in Chinese stocks due to their depressed valuations.
"Even with the recent moves they're like on a flat-line low compared to where they have been in the past. And you're sitting there with single multiple PEs, with double-digit growth rates for the big stocks that trade over here," Tepper said in an interview with CNBC on Thursday.
So what's the big hoopla about Chinese shares?
Well, let's begin with the Chinese economy which has been sagging lately as profits at China’s industrial firms fell at the sharpest pace since April last year, dragged down by weaker manufacturing as part of an economic slowdown.
Years of property speculation and spurious bank loans have also hit the Chinese economy hard.
And as explained by Peter Berezin, Director of research and Chief Global Strategist at BCA Research in this LinkedIn post, the Chinese government had no choice but to act this week:
And China stock bulls reacted favourably to all that stimulus, buying everything under the Chinese sun.
But while the iShares MSCI China ETF (MCHI) surged 18% this week, it remains well off its 5-year highs:
I know, hedge funds trade Alibaba (BABA), Baidu (BIDU), and JD.com (JD) and these stocks have clearly broken out here in the short run but when you look at their 5-year charts, they need to break above important levels to keep heading up:
I actually took the wise advice of my stock trading mentor, Fred Lecoq who worked with me at PSP, and bought BABA last Friday when he did before this week's hoopla but sold it a bit too early.
If it continues rising, I might buy it back but I'm not convinced and seen these Chinese stocks yo-yo so many times in the past following massive stimulus.
The hedge fund guys might have been selling the rally this week, I'll have to wait till November 15th for 13-F filings to be made public to see if that was the case.
Anyways, call me a China stock market skeptic but money is money!
And yes, the Chinese stimulus package will unleash more global liquidity which can further spur global risk assets (like tech stocks) but don't count on a big rally here depending on how US data goes.
Lastly, I note two weeks ago China raised its retirement age for the first time since 1950s:
China will "gradually raise" its retirement age for the first time since the 1950s, as the country confronts an ageing population and a dwindling pension budget.
The top legislative body on Friday approved proposals to raise the statutory retirement age from 50 to 55 for women in blue-collar jobs, and from 55 to 58 for females in white-collar jobs.
Men will see an increase from 60 to 63.
China's current retirement ages are among the lowest in the world.
According to the plan passed on Friday, the change will set in from 1 January 2025, with the respective retirement ages raised every few months over the next 15 years, said Chinese state media.
Retiring before the statutory age will not be allowed, state news agency Xinhua reported, although people can delay their retirement by no more than three years.
Starting 2030, employees will also have to make more contributions to the social security system in order to receive pensions. By 2039, they would have to clock 20 years of contributions to access their pensions.
The state-run Chinese Academy of Social Sciences said in 2019 that the country's main state pension fund will run out of money by 2035 - and that was an estimate before the Covid-19 pandemic, which hit China's economy hard.
The plan to raise retirement ages and adjust the pension policy was based on "a comprehensive assessment of the average life expectancy, health conditions, the population structure, the level of education and workforce supply in China," Xinhua reported.
But the announcement has drawn some scepticism and discontent on the Chinese internet.
"In the next 10 years, there will be another bill that will delay retirement until we are 80," one user wrote on a Chinese social media site Weibo.
"What a miserable year! Middle-aged workers are faced with pay cuts and raised retirement ages. Those who are unemployed find it increasingly difficult to get jobs," another chimed in.
Others said they had anticipated the announcement.
While anger abounds as China raises its retirement age, it was more than necessary and I agree with those who think these reforms will not be sufficient to fix a weak pension system.
Still, China has a deflation problem and these reforms and stimulus packages are needed or else it will export that deflation dragon and clobber risk assets all over the world.
I keep repeating this, the US is heading toward a prolonged recession, if China crumbles, the global economy is in big trouble. Canada is already toast.
On that cheery note, have a great weekend.
Below, David Tepper, Appaloosa Management founder and president and Carolina Panthers owner, joins 'Squawk Box' to discuss his thoughts on the US markets, state of the economy, the Fed's interest rate decision, his bets on the Chinese market and where he's finding opportunities, why he sold 84% of his stake in Nvidia in the second quarter, 2024 election, and more.
Next, Jeremy Siegel, Wharton School professor of finance, joins 'Squawk on the Street' to discuss how much of a game changer recent news from China is, how the US equity market looks, and much more.
Third, Jeff deGraaf, Renaissance Macro chairman, joins 'Closing Bell' to discuss the rally in China stocks and if now is the time to get into the market.
Lastly, Nick Colas, DataTrek Research co-founder, joins 'Closing Bell' to discuss the trading day, stating the tech rally will have to wait till year-end.
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