Chinese optimism is increasing. Why some investors are cautious

BEIJING – The latest Chinese policy signals are having a bigger impact on sentiment than solving deeper issues such as real estate, analysts said.

The Shanghai Composite closed at its highest level in three months on Thursday after state media reported that Chinese President Xi Jinping had chaired a Politburo meeting on the economy that morning.

The unexpected high-level meeting called for halting the real estate market decline and strengthening fiscal and monetary policies. It provided few details, but did confirm the interest rate cuts announced earlier this week by the central banks.

Markets should appreciate Beijing’s recognition of the severity of the economic situation and how its piecemeal approach has not worked so far, Ting Lu, chief China economist at Nomura, said in a report on Friday.

“The ‘shock and awe’ strategy could be intended to boost markets and boost confidence,” Lu said, but ultimately it is still necessary to introduce well-thought-out policies to address many of the “deep-seated problems to tackle.

Growth in the world’s second-largest economy has slowed, driven by the real estate crisis. Retail sales have risen barely more than 2% in recent months, and industrial profits have barely grown in the first eight months of the year. Exports are one of the few bright spots.

Nomura’s Lu said policymakers in particular need to stabilize the real estate sector as the country is in its fourth year of contraction. He estimated that the impact of additional stimulus would not exceed 3% of China’s annual GDP.

“Markets should place more emphasis on the specifics of the stimulus,” Lu said. “If not designed well, a rushed stimulus program, even if it seems large, can have a slow and limited impact on growth.”

The People’s Bank of China this week cut key interest rates and announced plans to cut rates for existing mortgage holders. The Ministry of Finance has not yet announced any major policy plans, despite reports of such plans.

For some investment firms, that’s still not enough to change their outlook on China.

“China’s policy moves to cut interest rates have not helped boost confidence among consumers, who are wary of borrowing in the first place,” said Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute, in an e-mail mail.

“We would be selling emerging market equities at this point,” he said, “as we have little confidence in Beijing’s willingness to extend the large stimulus measures needed.”

Christopher added that Thursday’s “announcement on the coming fiscal stimulus is welcome, but it remains to be seen whether the Chinese government is prepared to take the steps necessary to reverse the psychological damage to the sentiment of households and private businesses to make.”

The Chinese government has cracked down on real estate developers, tutoring companies and the gaming industry in recent years. Policymakers have since softened their stance, but business and consumer confidence has yet to recover.

The latest interest rate cuts in China follow the US Federal Reserve’s shift to looser monetary policy last week. American interest rate cuts theoretically give the Chinese central bank more room to lower the already low domestic interest rates.

A September survey of more than 1,200 companies in China by the US-based China Beige Book found that corporate lending fell despite record lows in the cost of doing so.

“You can certainly hope for a wealth effect from stocks and real estate, but stocks will be temporary and the drop in wealth from real estate is overwhelming compared to any relief,” said Shehzad Qazi, chief operating officer at China Beige Book, a US-based study. firm, said in a note Thursday.

He expects retail sales to pick up slightly over the next four to six months.

Qazi also expects the latest rally in Chinese stocks to continue into the final three months of the year. But he warned that the policy announced this week to drive more capital into the stock market “is not yet operational, and some may never be.”

These caveats haven’t stopped investors from digging into beaten-down Chinese stocks. The CSI 300 stock index climbed Friday, on pace for its best week since 2008. It could rise another 10% in the near term, Laura Wang, chief China equity strategist at Morgan Stanley, told CNBC’s “Street Signs Asia.”

The sentiment shift has spread worldwide.

“I thought what the Fed did last week would lead to easing by China, and I didn’t know they were going to bring out the big guns like they did,” David Tepper, founder of American Billionaires, told CNBC’s “Squawk Box” . on Thursday. “And I think there’s a whole shift.”

Tepper said he bought more Chinese stocks this week.

A key lesson from Thursday’s high-level government meeting was support for capital markets, in contrast to a more negative perception in China about the financial sector in recent years, said Bruce Liu, CEO of Esoterica Capital, an asset manager.

“Hopefully this meeting will correct this misconception,” he said. “If China wants to continue growing in a healthy way, [they] really need a well-functioning capital market.”

“I don’t think they sent any other messages,” Liu said. “It just is [that] they emphasize it with detailed action plans. That made a difference.”