China Stocks Burst Back Into Action, But Lose Their Way

Chinese shares are back in action again Tuesday after a week-long break. They burst out of the gate only to lose their way as the day went on.

It’s a disappointment for China and Hong Kong stocks, which have suddenly turned from the world’s worst-performing major indexes to the best-performing in a matter of a couple of weeks.

On Tuesday, the CSI 300 index of the largest mainland listings in Shanghai and Shenzhen opened on a 10.8% advance. But it has given the majority of those gains back, and is up 4.8% in afternoon trade as I write.

The Hang Seng Index in Hong Kong, meanwhile, is nursing a 6.8% loss, having been down as much as 10.1% at one point mid-morning.

The Hong Kong market has been open all last week, while mainland markets and businesses were shuttered for the “Golden Week” holiday in honor of China’s national day on October 1. Hong Kong stocks had advanced 9.3% while Shanghai and Shenzhen stocks were shuttered.

So we might expect mainland markets to have moved further lower after their strong start, were they not playing catchup with Hong Kong. Hong Kong is also the market where international investors can most easily express their opinion on mainland stocks, since allocations to the mainland A-share markets is highly restricted, with small trading quotas available only to the largest trading houses.

It’s no longer as necessary to gain mainland exposure, now there’s a “Stock Connect” scheme enabling investors in Hong Kong to buy mainland stocks in their home market. Likewise, mainland investors can use the Shanghai and Shenzhen exchanges to access select Hong Kong stocks.

The biggest loser in the Hang Seng today is the property developer Longfor Group (HK:0960), down 19.7% on Tuesday afternoon. The developer, with a portfolio of projects mainly in northern and central China, had seen its shares skyrocket 114.4% since the “stimulus story” in China began.

Beijing has finally demonstrated a sense of urgency in correcting the country’s economic course, and in particular in restoring some of the faith lost in the property market. We got the first promise of stimulus two weeks ago, tinkering around the edges that I indicated was unlikely to amount to a “big bazooka” to back the economy.

But that was followed by a pledge out of a cabinet meeting, chaired by Chinese President Xi Jinping, to engage in whatever fiscal spending is necessary to address “new situations and problems” in the Chinese economy. There were few details as to what that government spending would entail. But the promise of fiscal expenditure to bolster easier monetary policy did appear to amount to, perhaps not a bazooka, but at least a double-barreled shotgun of government support.

China shares are losing momentum Tuesday because, since then, we have had no further detail on what the fiscal spending will involve. Instead, we have additional promises that the central government will do what it takes to hit its growth target this year of “around 5.0%.” But we want cold hard cash. Not hot air.

The country’s top economic planner has added his voice to the chorus Tuesday. The chair of the National Development and Reform Commission, Zheng Shanjie, spoke with reporters, admitting that China faces “new situations and new problems” for the economy. The commission is China’s economic-planning agency.

Faced with these new challenges, Zheng pledged “incremental policies” on five fronts. Yes, five!

Namely: the countercyclical adjustment of macroeconomic policy; expanding domestic demand; support for the private sector; stabilizing the property market; and boosting the capital markets.

Now, this sounds like more of the same ole same ole. There weren’t any specifics about spending; simply reassurances that the central government is right on top of this issue, when it has demonstrated over and over again over the course of the last four years that it is definitely not on top of things.

The downward spiral in the property market started with the central government’s introduction in August 2020 of the “Three Red Lines,” measures on debt and borrowing that forced rapid deleveraging in the real-estate sector. After numerous defaults, insolvencies and bankruptcies, home buyers are very wary about putting down any money as a deposit on an apartment they fear will never get built.

I’ve said before in response to comments on my stories that the central government needs to backstop property projects. It needs to figure out a way to ensure homebuyers that yes, your property will get built if you put 5% or 10% down. And it needs to figure out a way to do that without pumping hot air back into the property market, likely by encouraging state-backed or well-funded private developers to buy troubled projects off ailing developers.

We didn’t get any of that kind of detail on Tuesday from the planning commission. The central government sometimes operates under the mistaken perspective that it is the economy, rather than shepherding and supervising it. Under Xi, the Chinese Communist Party has repeatedly belittled the private sector, and it is now paying the price of the loss of confidence that creates among business owners and operators.

Zheng did specify that China will issue C¥100 billion (US$14.2 billion) in special bonds for major projects (likely to be infrastructure), as well as bring forward C¥100 billion from the 2025 budget into this year.

But a little spending on roads, rail, airport and bridges — in a country that is amply provided with all of the above — is not what the Chinese economy needs. The planning commission also said China will upgrade its urban infrastructure for gas, heating, water and drainage.

These are not the details that the market would like to see. Morgan Stanley had anticipated that China might unveil a C¥2 trillion stimulus package at this meeting, and Citigroup pegged the figure at C¥3 trillion. We are still waiting.

Until we get concrete details to backstop the property market, stimulate consumer spending and restore consumer and business confidence, Chinese shares will be in a holding pattern. The excitement generated two weeks back will dissipate, if we don’t get details of what this fiscal spending will entail.

Promises to hit the growth target, at this point, simply aren’t enough.