China optimism is surging. Why some investors are cautious

BEIJING – China's latest policy signals will have a greater impact on market sentiment than addressing deeper issues such as real estate, analysts say.

The Shanghai Composite Index rose on Thursday to close at a three-month high after state media reported that Chinese President Xi Jinping hosted a Politburo economic meeting that morning.

The unexpected high-level gathering called for curbing the housing market slide and strengthening fiscal and monetary policy. It provided few details while confirming the rate cut announced by the central bank earlier this week.

Lu Ting, chief China economist at Nomura Securities, said in a note on Friday that markets should pay attention to how Beijing recognized the seriousness of the economic situation and why its piecemeal approach so far has failed to work.

“The 'shock' strategy may be to stimulate the market and boost confidence,” Lu said, but ultimately well-thought-out policies are still needed to address many “deep-seated problems.”

Growth in the world's second-largest economy has slowed, weighed down by a slump in the housing market. Retail sales have grown just over 2% in recent months, and industrial profits barely grew in the first eight months of this year. Exports are one of the few bright spots.

Nomura's Lu said policymakers especially need to stabilize real estate, which is entering its fourth year of contraction. He estimated the impact of additional stimulus measures would be no more than 3% of China's annual GDP.

“The market should pay more attention to the specific content of the stimulus package,” Lu said. “If poorly designed, a hastily implemented stimulus package, even if it appears large, can have a slow and limited impact on economic growth.”

The People's Bank of China slashed interest rates this week and announced plans to lower interest rates for existing mortgage holders. Despite reports of such plans, the Treasury Department has yet to release major policy.

For some investment institutions, this is still not enough to change their prospects for China.

Paul Christopher, global head of investment strategy at Wells Fargo Investment Institute, said in an email that “China's policy moves to lower interest rates will do nothing to improve the confidence of consumers who are afraid of borrowing in the first place.”

“We would sell emerging market equities at this time because we lack confidence in Beijing's willingness to extend the massive stimulus needed,” he said.

Christopher added that Thursday's “announcement of upcoming fiscal stimulus measures is welcome, but it remains to be seen whether the Chinese government is willing to take the necessary steps to reverse the psychological damage to confidence in households and private businesses.”

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

China's latest rate cut came after the Federal Reserve shifted to loose monetary policy last week. In theory, U.S. interest rate cuts give China's central bank more room to lower already low domestic interest rates.

A September survey of more than 1,200 Chinese companies by the U.S.-based China Beige Book found that corporate borrowing had declined despite historically low corporate borrowing costs.

Shehzad Qazi, chief operating officer of the China Beige Book, an American research organization, said: “One can certainly hope that stocks and real estate will have a wealth effect, but stocks will be temporary, and real estate will bring a wealth effect compared with any relief. The coming decline in wealth is huge.

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

Qazi also expects the latest rally in Chinese stocks to last into the last three months of the year. But he warned that policies announced this week to push more capital into stocks “have not yet been implemented, and some may never be implemented.”

The warnings haven't stopped investors from piling into China's battered stock market. The CSI 300 stock index rose on Friday, posting its best week since 2008.

This shift in sentiment has spread across the globe.

“I thought what the Fed did last week would lead to China easing monetary policy, but I don't know that they would do anything like that,” billionaire U.S. hedge fund founder David Tepper told CNBC's “Squawk Box.” Bringing out the big guns “I think it’s a complete transformation. “

Tepper said he bought more Chinese stocks this week.

Bruce Liu, chief executive of asset management company Esoterica Capital, said an important takeaway from Thursday's high-level government meeting was support for capital markets, which is in sharp contrast to China's negative view of the financial industry in recent years.

“Hopefully this meeting will correct this misunderstanding,” he said. “For China to maintain healthy development, it really needs a well-functioning capital market.”

“I don't think they're sending any different message,” Liu said. “It's just that they emphasized that with a detailed action plan. That made a difference.”

—CNBC’s Sonia Heng contributed to this report.