Shanghai, China – March 7, 2023 – The Oriental Pearl Tower, Shanghai Tower, Jin Mao Tower and World Financial Center can be seen on Lujiazui Street in Shanghai, China, on March 7, 2023.
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Analysts predict that Chinese stocks will continue to rise after the mainland market reopens after the Golden Week.
Economic support measures announced by Beijing last week pushed China's blue-chip CSI 300 index up more than 25% for nine consecutive days. On Monday, the Shanghai Composite Index rose more than 8%, its highest single-day gain in 16 years, and the Shanghai Composite Index soared 8.06% before the one-week holiday.
Hong Kong stocks subsequently fell on Thursday, snapping a six-day winning streak and raising concerns that the rebound from China's economic stimulus measures may be starting to fade.
Shanghai Composite Index
Now, the question on investors' minds is, how long will the rally last?
In China, this situation may continue for a long time after the mainland market returns to normal next Tuesday, said Eugene Hsiao, head of China equity strategy at Macquarie Capital. The decline is “short-term profit taking.”
Beijing's recent stimulus package coupled with greater participation from retail investors could fuel a longer rally, he said.
Shehzad Qazi, chief operating officer of China Beige Book International, said the rally could even continue until the end of the year.
But Qazi said that if the market becomes disappointed with the impact of stimulus measures, it risks “a serious reversal in sentiment by 2025.” In my opinion, stimulus measures are not enough to solve China's structural economic problems.
Qazi added that investors expect the stimulus to deliver “spectacular growth” to the economy in the coming months, and that enthusiasm would be tempered if the package delivers only a “modest boost.”
Lei Xiaoshan, founder of China Market Research Company, predicted that “China's stock market still has room for growth in 1-3 weeks.” However, Rein said it's not unusual for prices to fall as “investors liquidate their positions to win.” Given that the rally is largely driven by sentiment, there may be more volatility ahead because “no one wants to be the last one in, but no one wants to be the last one out either.”
Lu Ting, chief China economist at Nomura Securities, said in a report on Thursday that more individual investors are being incentivized to join the trade “for fear of missing out on what appears to be a once-in-a-lifetime rally.”
Fiscal stimulus takes center stage
Market sentiment has also been boosted by growing hopes that Beijing will roll out more fiscal policy and other support measures to boost the economy. The Ministry of Finance has yet to launch major policies to support growth. This is despite reports of such plans.
“The ultimate size and content of the fiscal package is likely to be quite provisional and uncertain,” Nomura's Lu said in a note, adding that investors should make a “more sober assessment” amid the recent market frenzy.
Macquarie Capital's Xiao said the stock market rally could be derailed if the central government's fiscal stimulus package fails to live up to expectations. He said other events that could shorten the rally include “stronger-than-expected U.S. jobs data suggesting a smaller rate cut by the Fed, or a Trump victory in November.”
China has been battling looming deflationary pressures due to a prolonged slump in real estate and weakening domestic consumer confidence. A series of economic data in recent months has been worse than expected, causing economists to worry that the world's second-largest economy may not be able to achieve its full-year growth target of 5%.
We're not yet in a world where finance is the dominant driver, so that's what we really want.
Alexander Coosley
Russell Investments Asia Pacific Investment Strategist
Last week, the People's Bank of China cut the amount of cash banks must hold, known as the deposit reserve ratio, or RRR, by half a percentage point. The central bank also lowered the 7-day reverse repurchase benchmark interest rate by 20 basis points to 1.5%.
Global X investment strategist Billy Leung said the key focus will be on the effectiveness of further stimulus measures.
Speaking on CNBC's “Signpost Asia,” Alexander Cousley, Asia Pacific investment strategist at Russell Investments, noted that some of the policies are slightly lacking – “We're not in this fiscal year yet. To be the dominant driver of the world, so that's what we're really looking for,” he said.
“The thing that I do worry about, and I think Russell is most worried about, is that we're still in a period where the Chinese authorities are reacting to the weak data and things are starting to improve, but we don't see actual follow-through,” Coosley said. .