As foreign investors process the implications of China’s substantial $114 billion stimulus package, a critical question emerges: will this sweeping economic initiative provide the necessary catalyst to rejuvenate the beleaguered Chinese stock market? Despite the immediate enthusiasm following the announcement, skepticism lingers among many investors about whether the measures will yield lasting benefits for the world’s second-largest economy.

The backdrop to this inquiry is the ongoing struggle of Chinese equities, which have lagged behind major global markets throughout the year. While other stock markets have thrived, China’s has been marked by persistent underperformance. In the face of a sluggish economy, authorities have previously implemented a series of piecemeal measures aimed at revitalizing growth and boosting stock prices, but these efforts have largely failed to capture investor confidence.

This week’s stimulus announcement marked a significant shift in approach, with the Chinese government unveiling a comprehensive package of rate cuts and an 800 billion yuan ($114 billion) facility dedicated to funding stock purchases. This initiative reflects Beijing’s renewed urgency in addressing the dual challenges of deflation and a distressed property market, which have significantly hampered economic recovery. Following the announcement, Chinese stocks experienced a notable rally, with the blue-chip index CSI300 erasing its losses for the year and poised for its strongest weekly performance since 2022. Additionally, the yuan reached a 16-month high against the U.S. dollar.

On Thursday, China’s leadership further solidified their commitment to support the economy through “forceful” interest rate cuts and adjustments to fiscal and monetary policies, fueling the rally even more. However, while the immediate market reaction was positive, many investors were quick to point out that these measures do not address the fundamental issues at the heart of the economic malaise.

Investors voiced concerns that the stimulus package was primarily focused on injecting liquidity into the markets rather than implementing fiscal measures that would directly spur consumer demand. Phillip Wool, head of portfolio management at Rayliant Global Advisors, articulated this sentiment, stating, “The package was mostly about getting liquidity into the markets, but we’re at a point in which more liquidity alone isn’t going to deliver the sustained recovery long-term investors want to see.” He emphasized that without a robust recovery in demand, borrowing would remain subdued, limiting the effectiveness of such measures.

The broader context of the U.S. stock market adds another layer of complexity. While U.S. stocks closed mostly lower on the same day as the stimulus announcement, investors were primarily focused on forthcoming economic data and indications regarding interest rate cuts. The contrast between the U.S. and Chinese markets raises questions about the effectiveness of China’s strategy compared to the Federal Reserve’s approach in supporting its economy.

Foreign investors have exhibited hesitance toward Chinese equities in recent years, resulting in a significant retreat from the market. Data from Copley Fund Research indicates that over a quarter of global funds tracked do not have any exposure to China, a stark contrast to 2021 when nearly all funds included Chinese assets in their portfolios. The CSI300 index and Hong Kong’s Hang Seng have experienced significant fluctuations, remaining down about 40% from their peaks in February 2021. In comparison, Japan’s Nikkei index has risen 24%, while the S&P 500 has surged by 45% during the same timeframe.

Portfolio managers such as Gary Tan from Allspring Global Investments remain skeptical about the efficacy of the recent measures. Tan indicated that a fundamental change in China’s deflation outlook and the status of the property market would be necessary for investors to feel confident enough to commit new funds. His underweight position on China reflects a cautious approach amid ongoing uncertainties.

Vivian Lin Thurston, a portfolio manager for William Blair’s emerging markets growth strategy, echoed Tan’s sentiment, remaining underweight on China despite the stimulus measures. However, she acknowledged the potential to consider adding certain stocks that demonstrate improved fundamentals and resilience to the broader economic challenges.

The ultimate success of China’s recent measures hinges on restoring institutional investor confidence in the equity markets. The country faces the risk of missing its economic growth target of approximately 5% this year due to the ongoing property downturn and lackluster consumer spending. Analysts assert that these challenges can only be effectively addressed through fiscal policies that inject money directly into consumers’ pockets. As Thurston stated, “Meaningful and effective fiscal stimulus needs to come through in order to address these key economic challenges effectively.”

Despite the prevailing skepticism, some investors see value in Chinese stocks. Jonathan Pines, head of Asia ex-Japan at Federated Hermes, and Wool from Rayliant both express interest in the attractive valuations present in the market. The Shanghai benchmark index currently trades at a price-to-earnings ratio of 12, compared to the Nikkei’s 21 and the S&P 500’s 27. This discrepancy has led to a selective interest in sectors poised for growth, particularly in technology. Bob Zhang, managing partner of Pine Street Capital, expressed optimism for companies involved in AI, semiconductors, and software as a service, which he views as undervalued and likely to benefit from global technological advancements.

Moreover, investors are keenly aware of the global economic landscape, particularly in relation to U.S. monetary policy. Zhang noted that if the U.S. continues to cut interest rates and China maintains its easing policies, the two economies could create a positive feedback loop that drives market growth.

In conclusion, while China’s $114 billion stimulus package has generated short-term excitement in the stock market, its long-term effectiveness remains uncertain. Investors are grappling with a complex interplay of factors, including liquidity, consumer demand, and the overarching economic environment. As foreign investment remains tentative, the path forward for China’s economy hinges on the government’s ability to implement meaningful fiscal measures that restore confidence and stimulate sustained growth. The ongoing dialogue among investors underscores the need for a comprehensive approach that addresses both immediate market concerns and the structural challenges facing the Chinese economy.

(Adapted from Reuters.com)

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