Chinese policymakers coaxed a rally out of downtrodden equities Thursday.
The Hang Seng China Enterprises Index jumped almost 4%, its best day since late July (figure below).
At the lows earlier this month, H-shares were down almost 35% from February of 2021, when Xi’s sweeping regulatory crackdown and accompanying societal overhaul began to take shape.
Calling the bottom was a fool’s errand last year. A never-ending deluge of decrees and policy pronouncements spanning everything from tech monopolies to the conduct of local celebrities shattered investor confidence. By the time Xi finally let up, China faced a new crisis in an acute power crunch. At the same time, policymakers and market participants were forced to grapple with Evergrande’s slow motion implosion.
The Chinese economy groaned under the weight of overlapping crises and rolling COVID lockdowns. Exports were the only bright spot last quarter. In November, the PBoC pivoted. December saw both an RRR cut and the first reduction in the loan prime rate in 20 months.
Read more: China Cuts Rates As Retail Sales Crumble, Economy Stumbles
Some now see a light at the end of the tunnel for Hong Kong-listed shares. Earlier this week, the PBoC cut the cost of medium-term loans, setting the stage for a second consecutive reduction in the de facto policy rate, which banks delivered on Thursday (figure below).
One-year LPR fell by 10bps, matching this week’s MLF cut. The five-year tenor, which is linked to mortgage rates, fell five basis points.
Not everyone was convinced the moves are sufficient. “It shows the PBOC’s still relatively prudent stance and it avoids sending too strong an easing messages regarding the property space,” Credit Agricole’s Xiaojia Zhi remarked, of the smaller reduction in the five-year rate.
One analyst at Guosheng Securities said simply, “it’s not big enough.” Still another (at ANZ) noted that LPR quotes are “market-driven.” That’s true. Sort of. LPR is priced off the MLF rate, but banks are ostensibly quoting their own rates. That said, December was the first time since the August 2019 revamp that an LPR reduction wasn’t prompted by an MLF cut. In other words: The PBoC guides the quotations. Even December’s move was presaged by the RRR cut. LPR isn’t “administered,” per se. But it’s not entirely “market-driven” either. Semantics aside, the ANZ analyst’s point was that the smaller reduction in the five-year rate suggested mortgage demand is still reasonably robust, while corporate loans, which reference the one-year rate, “lack sufficient demand.”
Whether it makes sense to bottom fish in beaten down Hong Kong shares is an open question. The PBoC’s easing bias helps, but as Bloomberg’s Hong Shen wrote earlier this week, policymakers can just as easily undermine sentiment if they inadvertently convey a sense of panic.
“It’s increasingly clear that it takes more than monetary easing and fiscal stimulus for Beijing to restore domestic confidence,” Hong wrote, citing declines in Chinese equities following a press conference earlier this week during which PBoC Deputy Governor Liu Guoqiang emphasized that the central bank needs to be proactive in order to restore confidence. “If the market stops caring, it will make things more difficult because there’s nothing more lamentable than a dead heart,” Liu said.
That’s pretty dramatic. “You don’t easily hear such expressions from even Liu’s more talkative Western colleagues,” Hong remarked, on the way to asking, “If that doesn’t betray official concerns about waning business confidence in the world’s second-largest economy, what else would?”
On Thursday, though, stocks cheered the central bank’s ongoing dovish pivot, which many market participants expect to manifest in another RRR cut sooner rather than later. At the same time, Beijing pushed back on reports that regulators are poised to impose stricter requirements on investments by tech companies.
“[The] PBoC sent a loud and clear easing signal through [this week’s] press conference, partially as policymakers try to guide market expectations,” Goldman wrote, commenting on the same proceedings mentioned above. “While the dovish signal is largely in line with our expectation, it appears that the PBoC is accelerating easing measures to stay ahead of the curve and to prevent expectations and demand from softening further,” the bank added.
If you’re concerned about the juxtaposition between sky-high multiples and policy tightening in the US, I suppose it’s worth noting that Hong Kong shares, and especially big-tech, are a relative bargain in an environment where policymakers are embarking on a front-loaded easing cycle.
[Insert falling knife joke.]
