China-related exchange-traded funds (ETFs) witnessed a surge on Tuesday as the Chinese government announced plans to implement stronger stimulus measures in order to bolster the country’s stumbling economic recovery. This optimistic news has lifted bullish sentiment among foreign investors, who are now injecting more money into Chinese equities despite low growth in the first half of 2023.
The Invesco Golden Dragon China ETF (PGJ) which tracks the American depositary shares of companies based in China, rose by 1%. Similarly, the KraneShares CSI China Internet ETF (KWEB), offering exposure to Chinese software and information technology stocks, traded 0.6% higher. The iShares MSCI China ETF (MCHI) and the SPDR S&P China ETF (GXC) also experienced a surge of 1.8%, according to FactSet data.
Confident Recovery Outlook
The Chinese Communist Party’s Politburo, a key decision-making body in the country, recently met to outline the overall economic assessment and policy outlook for the remainder of 2023. During this highly anticipated event, policymakers expressed confidence in the recovery of the world’s second-largest economy. They also revealed plans to address the hardest-hit areas, including the debt-ridden property market and the struggling private sector.
Focus on Property Sector
Beijing has pledged to promptly adjust property policies in response to changing supply-demand dynamics. This signals the government’s intention to introduce easing measures aimed at rescuing the property sector, which accounts for approximately one-third of China’s economy according to some estimates.
Notable Shift in Tone
Market participants have noticed a subtle change in the Politburo’s language regarding the property sector. For the first time since 2019, the mid-year review of the economy excluded President Xi Jinping’s signature slogan “houses are for living, not for speculation.” This phrase was originally introduced in 2016 as a clear indication of the government’s efforts to cool the real estate market.
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Positive Signals, Yet Cautious Approach
The meeting’s readout exceeded market expectations, offering a glimmer of hope for resolving the local government debt issue and alleviating pressures in the property market. The team of economists at BofA Global Research, led by Helen Qiao, expressed their views on this positive development.
A Temporary Downturn
Despite policymakers acknowledging the prevailing weakness in domestic demand, they firmly maintained that the current downturn is merely a temporary phase. However, instead of immediately resorting to an aggressive stimulus package, they opted for a more cautious approach. BofA economists emphasize that this indicates policymakers’ awareness of the downward pressure but also reveals their belief that immediate aggressive stimulus measures are unnecessary.
Delayed Meaningful Measures
Following the meeting, the Hang Seng China Enterprises Index experienced a remarkable surge of 5.3%, marking its best daily performance since November 2022 when Covid-19 restrictions were initially relaxed. Likewise, the CSI 300 Index on the mainland advanced by 2.9%, achieving its most significant gain since November 29, 2022.
The Chinese yuan exhibited strength as it rallied by as much as 0.7% against the US dollar, reaching a trading rate of 7.13 per dollar. Reports highlighted the major state-owned banks’ strategic move of selling US dollars to acquire yuan, both in onshore and offshore spot markets during early Asian trading.
Foreign Investment Inflows
Foreign investors demonstrated renewed confidence in the Chinese equities market, with a net inflow of 18.9 billion yuan ($2.7 billion) through the trading link between Hong Kong and the mainland. This marked the most substantial daily inflow since December 2021, signifying growing international interest in Chinese stocks.
Economic Challenges Persist
While these positive developments may instill optimism, it is crucial to acknowledge that China continues to face challenges stemming from a weakening global economy and the impact of U.S. restrictions. These factors necessitate a comprehensive and strategic approach to sustain long-term economic stability.
In conclusion, China’s recent meeting showcased a blend of positive signals together with a cautious stance on implementing immediate aggressive stimulus measures. The market’s response has been encouraging, indicating growing investor confidence. However, ongoing challenges from external factors highlight the need for robust long-term strategies.