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Article09 Feb 2024

China: Will it work this time?

Asia Pacific Strategy

Weak governance had caused Chinese equities to gain just a quarter of the cumulative growth in GDP in the past 22 years.

Key Takeaways

  • Renewed hopes for major additional stimulus lifted Chinese equities just ahead of the Lunar New Year. In particular, the replacement of the chief securities regulator lifted hopes, as previous two such occasions marked the end of bear markets.
  • The reality is that earnings and dividends have both fallen to similar levels as 2011.  Policies over the past year had not created a sustained rally, as investors are not interested in infrastructure or stabilization funds or curbs on short selling. We believe that the missing pieces are stronger governance and demand recovery.
  • Weak governance had caused Chinese equities to gain just a quarter of the cumulative growth in GDP in the past 22 years. The new regulator would do well to strengthen governance to boost dividends and buybacks, as well as management attention to shareholder interest.
  • On the demand side, most of the stimulus so far went to boosting infrastructure and favored industries, implying even more supply amid deflation. An area that could use large amounts of stimulus is childcare, in order to slow down China’s population decline.
  • While a tactical rally is possible given depressed sentiment, a sustained recovery would depend on addressing demand and governance. If policymakers do steer towards this direction, we would prioritize growth sectors, with high cash levels and negative net debt (FIGURE 5), as these are the most likely to lift dividends and buybacks.

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