The latest positivity around Chinese markets doesn’t yet offer the kind of clarity most international investors are looking for to move beyond selective plays. Chinese stocks ended the week with four straight days of gains — a rare upswing after a dismal start to the year. A combination of official rhetoric, monetary policy moves and media reports helped support the turn higher from multi-year lows. “The litmus test for a more sustained recovery in shares would be sequential improvement in economic data,” David Chao, global market strategist, Asia Pacific (ex-Japan) at Invesco, told me Thursday. “I think the bar might be higher this year given the past few years of underperformance.” “Investing in China, you have to have an active strategy,” he said, emphasizing the need to focus on industries that receive policy support. Three that Chao mentioned were: high-tech manufacturing, robotics and alternative energies. Policymakers in the last week signaled they are willing to do more to support the economy as a whole, although its unclear to what extent. The People’s Bank of China announced a bigger-than-expected cut to one of their key monetary policy tools, the reserve requirement ratio, effective Feb. 5. When I asked PBOC Governor Pan Gongsheng at a press conference Wednesday about implications of U.S. Federal Reserve easing, he acknowledged that would create room for China to loosen its monetary policy as well. On real estate, the PBOC, the high-level National Financial Regulatory Administration and the housing ministry this week also made concerted statements about supporting struggling developers. This kind of cooperation “shouldn’t be taken for granted,” Edward Chan, a director at S & P Global Ratings, told me Friday. He noted how previously the PBOC tried to help real estate but the housing ministry was less supportive. But whether improved coordination necessarily means stocks will rise broadly is another matter. Sentiment is low, and the retail investor-dominated Chinese stock market is no exception. Schelling Xie, an individual investor in mainland Chinese A shares, said state-backed buying was helping to support stocks with larger market capitalization versus smaller ones, and expected them to have to sell at some point. “The decline [in A shares] is because confidence has collapsed, the economic fundamentals are too poor and policies are slow to respond to deflation,” Xie said in Chinese, translated by CNBC. Such gloom is common in many of my conversations in Beijing. But anecdotes and data show that pockets of high-growth remain. The few areas with investment increases last year were in manufacturing and infrastructure. HSBC analysts on Thursday revealed their buys in those categories include China railway equipment maker CRRC, diesel engine and truck maker Weichai Power and factory automation supplier Inovance. All three are listed on mainland Chinese stock exchanges. Weichai and CRRC also trade on the Hong Kong exchange. China has said it wants to boost high-end manufacturing. In the last week, top officials — including the premier and securities regulator —also talked more about the need to support and develop capital markets. “After a year of more false starts than most people can really remember, institutional interest in the onshore market is going to need a little more than a single week of good news before you see any material interest rise,” said Peter Alexander, founder of Shanghai-based consulting firm Z-Ben. “If the government can come out and say very concisely this is what we’re going to do, this is how we’re going to do it, that will have a far greater impact on sentiment,” he told me Friday. Ultimately, Alexander said that China is looking at building its financial system in which the stock market might not play as great a role as it does in the U.S., but rely slightly more on bank lending. Many international funds are not about to wait around. Asia funds tracked by HSBC have been cutting exposure to mainland China since the beginning of 2023, HSBC analysts said in a Jan. 25 report. As of Jan. 23, foreign institutional investors withdrew $4.3 billion from Asian stocks, mostly mainland China’s and India’s, the report said. In the past six months, foreign investors have pulled around $30 billion from mainland Chinese A shares, the report said. For Citi analysts, that kind of institutional uncertainty about China itself means getting exposure to the market recovery can come through European proxies. Take, for example, LVMH’s surge on Friday after reporting growth, including 30% in China in December. Citi analysts also include adidas and Kone in their basket of European stocks with China exposure. — CNBC’s Michael Bloom contributed to this report.
