China reopening play ‘overhyped’ as stock market losses inflict pain, ‘spy balloon’ rekindles US tech sanction

Chinese stocks were the world’s best performers in the opening weeks of 2023 through the Lunar New Year. Over the past two weeks, benchmark indices tracking the securities have suffered a beating to rank among the biggest losers globally. The pullback reflects doubts in the mind of investors and analysts, with some questioning the durability of the China reopening bets. Goldman Sachs said its onshore clients lacked conviction about the strength of China’s economic rebound while geopolitical issues dominated conversations on its marketing trip this month. Since Beijing began rolling back its zero-Covid curbs in November, Chinese equities at home and abroad have surged by as much as 50 per cent, prompting Wang Qi, CEO of MegaTrust Investment in Hong Kong, to warn the rally may have gone too far. The CSI 300 Index’s charge into bull-market territory on January 30 lasted only for one day. “This China reopening trade is overhyped,” Arthur Budaghyan, chief emerging-market strategist at Montreal-based BCA Research said in a webcast on Thursday. “We expect the Chinese economy to recover, but the issue is how much is already priced in.” Global fund managers may have the answer. Since ploughing a record US$21 billion into yuan-denominated stocks in January, their net buying has slowed to US$5.4 billion over the past two weeks, according to Stock Connect data. Mainland Chinese investors took US$2.1 billion off Hong Kong-listed stocks at the same time. The Hang Seng Index slipped 6.6 per cent over the past two weeks, while the CSI 300 Index of onshore stocks declined 1.8 per cent and the Hang Seng China Enterprises Index tumbled 8.3 per cent. The MSCI China Index slipped 7.8 per cent over the same two-week period. The Hang Seng Tech Index slipped 7.1 per cent since Budaghyan asked investors to fade the tech rally on February 1. Last week’s “spy balloon” incident validated concerns among mainland investors. The Biden administration last week blacklisted another six entities allegedly linked to the Chinese military, blocking their access to US technology exports. The bleak economic reality this year could offset current optimism, according to Budaghyan at BCA Research. Industrial activity, a major driver for the Chinese economy, is likely to disappoint as infrastructure and manufacturing investments stay weak as local governments struggle with a fiscal budget crunch. Chinese banks extended a record 4.9 trillion yuan (US$720.7 billion) in new loans in January, according to central bank data, to support the Covid-battered economy. Yet, loans to households remained sluggish, suggesting weak sentiment amid job insecurity and property market headwinds, ING Bank said in a note on Friday. China’s economy “is still not firing on all cylinders,” strategists including Julia Wang at JPMorgan Private Bank said in a report on Friday. “Housing sector-related data is still quite weak. Income growth will likely recover with a lag. It still continues to be a question of confidence in the sector.” The firm maintained its bullish view on Chinese equities, expecting the government to strengthen its policy support to shore up growth going into the official policy planning season in March. The market outlook will mainly depend on the strength and sustainability of China’s economic recovery, strategists including Winnie Wu at Bank of America Securities said in a report on February 10. A rebound in consumption could drive up business confidence and investment activities, improving jobs and income outlook and ultimately lead to property market recovery, according to the report. The flip side is a short-lived recovery that could erode optimism. Despite the February hiccup, China stock bulls appear to outnumber the bears. Goldman sees more price upside even after the recent sharp rally, while Morgan Stanley and JPMorgan Private Bank have recommended buying the dips. The fragile US-China relations, and a host of other headwinds, “are all understandable,” strategists including Laura Wang at Morgan Stanley said in a report on February 9. “We remain constructive while expecting some interim volatilities.”