Note to China's Economic Kingpins: It's Time to Put Up or Shut Up

I’ve written a lot about Chinese stocks, and Beijing stimulus, in the last 3 weeks. They ran up rapidly to give bulls hope. But we’ve come to crunch time.

The Chinese leadership, which has announced a multi-ministry briefing tomorrow, needs to put up, or shut up.

Investors are losing patience. Chinese shares are mildly in the red today, with the CSI 300 index of the largest stocks in Shanghai and Shenzhen down 0.6%.

In Hong Kong, the Hang Seng index is off 0.2% on Wednesday despite the city’s leader today giving his third policy address. John Lee delivered a hodgepodge of measures relaxing mortgage rules, easing visa access, cutting duties on high-end liquor, and pledging to develop the “silver” and “low-altitude” economies.

China-focused property stocks did rise today, in anticipation of tomorrow’s briefing. Longfor Group LGFRY (HK:0960), with a portfolio in northern and central China, has been the sector bellwether in either direction, topping the Hang Seng today with a 7.8% advance. But it also falls big when faced with any skepticism on the sector, plunging almost 20% when trading resumed after the “golden week” holiday in China.

The Hang Seng Properties index is up 1.9% on Wednesday, with high-end mainland developer China Overseas Land CAOVY (HK:0688) up 3.8% and rival China Resources Land CRBJY (HK:1109) up 2.5%.

These are tepid moves, though, compared with the massive adjustments we’ve seen in recent weeks.

In my last column, asking if this is the best or worst of times for Chinese stocks, I noted that Minister of Finance Lan Fo’an would be giving a briefing on Saturday. At that address, the cabinet information office assured us, he would introduce measures to strengthen fiscal policy and shore up China’s economy.

Did he? He did not. He talked about “comprehensive measures” that surely come so that China hits its government-mandated target of “around 5%” this year. But any numbers or details on what that entails were, once again, sorely lacking.

“Please be assured,” he said, in a way that leaves you anything but assured. “Our countercyclical adjustment goes far beyond what I have mentioned.”

So, mention it already!

The Beijing leadership has been stringing markets along since first promising major stimulus back on September 24. The major runup in markets came because, besides monetary tweaks to interest rates and mortgage terms, we’d be getting fiscal spending out of the government coffers.

Since that was first mentioned, we’ve had essentially no detail at all on what the fiscal expenditure will entail. It’s like promising that the best thing ever is, err, coming right up … it’s right around the corner … just you wait and see!

Eventually you have to deliver on those promises. Build that wall, make America great again, and if you had four years in charge, and it didn’t get great, maybe you can’t deliver.

Eventually you have to deliver on those promises. Build that wall, make America great again, and if you had four years in charge, and it didn’t get great, maybe you can’t deliver.

Now we have a briefing set for 10 a.m. Beijing time on Thursday with officials from the central People’s Bank of China alongside staffers from the finance-sector regulator as well as the ministries of housing and finance.

That combination of officials is encouraging optimism that we’ll see specific measures to boost the housing market in China. It has been in a tailspin since the introduction in August 2020 of the “three red lines” on credit and debt that developers must heed. The rules forced a string of defaults and bankruptcies, undermining prices, and confidence in housing as an investment.

There’s speculation that we’ll see more projects added to the “white list” of developments that the government is willing to support through to completion, often via state-owned developers taking them on. This would be very welcome. There are 48 million homes that have been sold but are incomplete, according to a Bloomberg estimate in August, roughly equivalent to the entire housing stock of Germany.

Lan, the finance minister, on Saturday promised the “boldest measure” to address problems with local-government debt. He pledged a one-off quota (that he didn’t specify) to allow local governments to swap out “hidden debt” incurred on infrastructure spending in exchange for official government debt. Many local governments are cash-strapped since they used to get the bulk of their revenue from land sales for property development, and fought both a costly battle to eliminate Covid-19 on top of bridge, road, rail and airport construction.

If there are, once again, no specifics on Thursday on the amount of government spending, it’s highly likely Chinese stocks will fall, and developers will give back recent gains.

Christopher Wood, the global head of equity strategy at Jefferies, notes that the recent moves in China have reinforced its reputation for volatility “in spectacular fashion,” as he puts it in his Greed & Fear report.

The Shanghai composite skyrocketed 151% from July 2014 to June 2015, only to fall 49% by January 2016. In late 2022, amid optimism that that the costly war against Covid was ending, Chinese stocks shot up 60% from October 2022 to January 2023, then fell 35% by January 2024.

Retail investors make up around 50% of the market capitalization and 60% of the trading volume in the walled-off A share mainland stocks markets. That makes them highly momentum-driven. That means Shanghai and Shenzhen stocks will continue their wild gyrations. Hong Kong should be more measured in its trading.

Given the current urge among Chinese officials to stress how much stimulus is right around the corner, Wood asks whether the motivation is simply the realization that China, as projected by outside economists, is highly likely to miss its growth target of around 5%. Or there is something far more serious occurring in the economy, clear behind the scenes only to officials, that will depress growth?

Since the September stimulus talk, mainland stocks remain 19.3% higher. The Hong Kong market is up 11.2%. Retail investors in both markets, serial underperformers, are desperate to see the run continue. Institutional investors, many of them now underweight China, are forced into catch-up buying if the rally sustains.

But the optimism is fading. Watch this space for stimulus details out of tomorrow’s briefing. Or watch out for another fall.

At the time of publication, Alex Frew McMillan had no position in any security mentioned.