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Article21 May 2024

Chinese Equities’ Tipping Point

Asia Pacific Strategy

Chinese authorities finally turned to lift demand and investor returns. Demand stimulus is effectively quantitative easing for property. The significance isn’t whether the amount of funding is enough, but rather the government is determined to stop expectations for price decline and restore household demand.

Key Takeaways

  • It’s been more than a year since China’s recovery fizzled after the initial reopening from the pandemic. During this time, a drip feed of policy stimulus, sprinkled with occasional tightening, left investors wondering when we will reach a tipping point of sufficient policy.
  • We believe that point had been reached in April-May, when China’s policies refocused to lift demand and investor returns, both were key missing pieces of the puzzle we noted earlier.
  • Quantitative easing (QE) for real estate is essentially the demand stimulus. Local governments (LGs) have announced plans to purchase existing homes to use as affordable housing, to repurchase land, and to subsidize demand for upgrade and replacement. The central bank and the central government plans to provide inexpensive financing. We believe this will help the real estate market find supply-demand balance soon. This will likely stop the declines in home price expectations and help to restore some consumer confidence.
  • Capital market reforms aiming to improve investor returns are likely more meaningful for longer-term investors. New securities rules issued in mid-April called for listed companies, with excess cash, to increase dividends and buybacks, or face penalties. This regulatory effort echoes those of the Tokyo Stock Exchange 14 months ago that contributed to the subsequent 40% rally in Japanese equities.
  • Still, structural impediments remain, but could be mitigated. Risks in geopolitics and protectionism are high, but the previous surge in tariffs had not caused lasting damage to China’s economy, as businesses diversified markets and supply chains. Population decline is a long-term challenge, but unlikely to cause significant near-term disruption.
  • We believe an earnings rebound is on the way. For starters, more firms are increasing dividends, especially high growth tech platforms. The potential repair in real estate expectations can help to lift earnings in the Financials and Consumer sectors.
  • Chinese equity bull markets can last two years if supported by earnings. Valuations have rebounded but remain at the lower end of historical range. A return to moderate earnings growth and average valuations of could produce meaningful returns. We believe Chinese equities can outperform global equities in the second half.

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