Investors are more bearish on China than they were in May, expecting further declines in China’s currency and a persistent property crisis.
(Bloomberg) — A precedent-breaking third term in office for President Xi Jinping is expected to give China’s beleaguered stock market a welcome boost, but investors appear wary.
The yuan will continue to slide, while the property market crisis will fester for at least another 12 months, majority of MLIV Pulse survey respondents predict, making them more bearish on the world’s second-largest economy than they were in May.
“China obviously is grappling with a slowdown of some generational importance,” John Woods, Credit Suisse Asia Pacific chief investment officer, said on Bloomberg TV. “The China story is really contingent on policy support.”
A majority of the 451 survey contributors see Chinese equities gaining ahead of and over the six months following the confirmation of President Xi’s third term in power. Market watchers expect the Communist Party congress, scheduled to take place in mid-October, to remove any uncertainty about China’s leadership reshuffle, economic priorities and Covid policy direction.
“With clarity on leadership and policies post the event, it would not be inconceivable that all levels of government shift their focus in reviving economic growth for the country,” said Steven Luk, Chief Executive Officer at FountainCap Research & Investment in Hong Kong.
China’s stock market has been among the worst performing globally this year as an array of factors from the ongoing property crisis to worries over growth, Covid Zero strategy and regulatory uncertainty weigh on the sentiment. The benchmark index tracking onshore shares is down more than 30% from a 2021 peak.
“It’s been quite volatile,” Nisa Leung of Qiming Venture Partners said on Bloomberg TV. “There is still a lot of opportunities.”
Even key earnings beats and stimulus efforts like a surprise rate cut have failed to generate optimism as traders see persistent Covid lockdowns standing in the way of any meaningful recovery.
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The real estate woes, in particular, are stoking concern about liquidity and indebtedness — and the extent to which that will impact other parts of the world’s second-largest economy. Despite a slew of government policies in recent months to prop up the sector, the majority of the poll respondents believe Beijing will be unable to stop the home market crisis in the next 12 months.
“The downside risks for the sector are decelerating, but it takes time to restore market confidence,” said Banny Lam, head of research at CEB International Investment Corp.
Regulatory uncertainty is another reason stopping investors from betting on China. About two thirds of investors said they have reduced or closed their exposure to China due to regulatory risks.
Tech behemoths have been particularly hurt by Beijing’s sweeping crackdown on private enterprises, one aimed at curbing their market influence and monopolistic practices. A gauge tracking Chinese tech shares listed in Hong Kong is down more than 25% this year.
Investors are also very bearish on the yuan. The currency has already fallen 8% against the dollar this year and saw a sharp selloff last month when the People’s Bank of China unexpectedly cut rates.
Amid Wall Street forecasts that the yuan will touch 7 per dollar — a key psychological breach that could trigger capital outflows — the survey suggested it is more likely to hit 7.20 before 6.50.
That’s likely predicated on a strong belief there are more gains ahead in the short term for the greenback, as a significant majority sees the Bloomberg Dollar Spot Index higher in a month’s time.
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With negative sentiment swirling around fresh lockdowns to curb Covid in China’s southwestern megacity of Chengdu, the backdrop of a weak currency lends little conviction for foreign investors to pick up the nation’s government debt either. The majority of those surveyed said they thought Treasuries would offer better value over the next 12 months.
China’s 10-year benchmark note now yields about a 60 basis point discount to its equivalent in the US, a far cry from last year, when investors bought the bonds at a record pace, hailing them as an alternative safe haven due to their lack of correlation with global assets.
The Chinese Communist Party’s twice-a-decade leadership congress next month could bring some adjustments in Covid restrictions, which “would be great for markets globally,” Stephen Innes, a managing partner at SPI Asset Management, told Bloomberg TV.
Citigroup Inc. strategists also see the possibility of positive developments for China investors coming out of the plenum, including a more definitive action plan to scale out of the Covid Zero strategy. Still, a team including Jamie Fahy don’t see much of an impact this year.
“These measures are most likely a 2023 theme once the politics have settled,” Citigroup analysts said.
Join us on Sept. 5 at 2:30 p.m. Hong Kong time (7:30 a.m. London) for a discussion of the survey results with Becky Liu, managing director, head of China macro strategy at Standard Chartered Bank, Simon Flint, a Markets Live strategist at Bloomberg News, and Sofia Horta e Costa, chief correspondent for Chinese markets for Bloomberg News. For more markets analysis, see the MLIV blog.
(Updates with a TV clip and comments from an executive in the fifth paragraph.)
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