On Thursday, a reader suggested, not implausibly, that a recent high-profile bull call on Chinese equities likely delivered outsized gains to the “name brand” hedge fund manager from whom that call emanated.
Over the course of just 13 trading sessions, Hong Kong-listed Chinese shares soared a stupendous 34% as market participants bet big on Beijing’s stimulus push. Or perhaps I should say they bet big on the likelihood that the mere announcement of a broad-based stimulus push would drive huge gains for beaten-down local stocks.
As discussed at some length here (and on countless occasions previous), everything hangs on fiscal follow-through. The Party can’t disappoint on that front. Monetary policy alone won’t work in the absence of aggressive demand-side stimulus at the federal level. If the fiscal impulse comes across as weak-willed, the most recent rebound in Chinese stocks will be just another in a long series of dead cat bounces since 2021.
A lot of the money that’s gone into equities, and particularly Hong Kong shares, in recent days is opportunistic cash looking for a quick score (relatedly, some of it’s probably an unwind of the “long Japan” / “short China” placeholder). Make no mistake: If Beijing underwhelms on the fiscal front, some of those inflows will reverse. Have a look at the figure below.
Those are proxies for positioning in H-shares and A-shares. As JPMorgan’s Nikolaos Panigirtzoglou explained, “the cumulative buying impulse has been stronger in HSCEI futures in comparison to CSI300 futures.”
Why? Simple: Because it’s easier to speculate on Chinese equities on the HKEX, where liquidity’s generally better and it’s easier to get out should you need to. “Hedge funds [have] in the past shown a strong preference for HSCEI in terms of expressing bullish views on Chinese equities such as during the reopening trade of November ’22 to January ’23,” Panigirtzoglou wrote.
Remember what happened to that trade? The reopening trade Panigirtzoglou mentioned, I mean? It fizzled, and a very large share of the money which flowed in to bet on it flowed out just as quickly.
The point: For now, the bull trade on China is just that. A trade. Yes, it was enormously profitable for some folks by appearances. But no, it’s not yet a bet on a fundamental turnaround for the world’s second-largest economy. If Xi doesn’t deliver the goods on the fiscal side, speculators — which is to say hedge funds — will take their profits and run.
Panigirtzoglou gets it. “Needless to say, foreign investors… would be rather unwilling to sustain long Chinese equity positions into the US election unless any fiscal announcement surprises to the upside by then,” he remarked.
I assume this factors in the fact that China has been closed all week while Hong Kong has been open since Tuesday?
Yes. And it anyway doesn’t matter: It’s true regardless. H-shares are the natural place to speculate given far easier access, more liquidity, etc etc
Can’t recall if discussed already, but not much is confirming the move in China stocks – as in, not commodities, related foreign stocks, FX, etc.
USD 1 TR would be a bazooka, if it is actually fired – and at the right targets. The right targets might be anathema to the trigger puller. But a bazooka is not going to fix the fundamental problems. So this is a trade – shorter if no or misfired bazooka, longer if otherwise.
+1
The debate among Xi’s men is, I assume, not only bazooka size but also bazooka target.
Should USD 1TR from special central govt bond issuance be directed to:
1. Reducing the USD 8 TR of local government and LGFV debt, the service of which consumes USD 0.6 TR annually and a fifth of LG revenues?
2. Consumers in hopes they will spend most of, rather than save it or using it to pay down their USD 11 TR of debt?
3. Business as tax cuts or seed money or targeted forgiveness of their USD 36 TR debt?
4. RE developers in the form of mass buying of the 8MM unsold homes currently representing USD 1.5 TR of depreciating and illiquid assets or households in the form of mass buying of the 60MM sold but vacant and homes currently representing USD 11.5 TR of depreciating and illiquid assets?
5. Tried-and-true-and-politically-safe infrastructure investment, now including favored uses such as more semiconductor fabs and more submarines?
Total debt and depreciating assets on China’s balance sheet excluding central govt is USD 68 TR. So hoped for USD 1 TR fiscal bazooka payload is about 1.5% of “target” size.
The US targeted 1 2 3 and 5 – with a bazooka payload of USD 4 TR (initial fiscal stimulus, w/ more added every year via deficit). The US debt totals are local govt USD 3 TR, consumers USD 20 TR, businesses USD 20 TR. The US totals for unsold/vacant and depreciating homes is negligible. Total debt and depreciating assets on US balance sheet excluding central govt is USD 43 TR. Payload was about 9% of “target”.
(All numbers ballpark at best, and hallucinated at worst.)