Chinese stocks have shot up more than 35% in under three weeks after Beijing took coordinated steps to stabilize its economy in mid-September. But to sustain gains, investors now need China's government to deliver more details on its plans for revitalization. China's market was closed this past week for the country's Golden Week holidays, with trading resuming on Monday. Investors are waiting to see if Beijing's vows to encourage consumers to spend more during the holiday period come true -- and spark more changes as they return.
Despite the market's sharp moves, fund managers and economists are skeptical Beijing can stop the economic doom loop that has set in. One concern: The measures China's government is talking about, among them significant stimulus spending, may not do much to tackle the growing list of structural challenges that are impeding the country's longer-term growth prospects.
But even those worried about the next phase of China's growth note the batch of efforts mark a change. "It's a signal that we have been waiting for that they understand the economy is at a knife's edge, and the deflation issue has hit the upper echelon of the Communist Party and they understand deflation can lead to a negative cycle," said Mary Lovely, a senior fellow at the Peterson Institute for International Economics in an online briefing held by the Centers for Strategic and International Studies on Friday. Beijing has created mechanisms to support the stock market, further lower interest rates and how much banks need to hold in reserves, and reduce rates on existing mortgages. The government also plans to recapitalize the country's six largest banks to nudge them out of capital-preservation mode -- but details are yet to come.
"The average Chinese consumer and private-sector company had lost a great deal of belief in the Chinese Communist Party and President Xi always being there for them, doing the right thing," says Jorry Noeddekaer, head of the Polar Capital Emerging Markets team. "What China is doing now is putting a hand under the private sector and aiming to define where the floor is."
The run-up in the past couple of weeks has been driven largely by hedge funds and other nimble investors, with longer-term fund managers and pensions monitoring the situation, says Brian McCarthy, principal at global macro advisory Macrolens. The details need to live up to expectations -- and those expectations are rising, with some five trillion to 10 trillion renminbi in stimulus, he says.
Such a package would likely require China to embark on the types of mega-infrastructure projects it has tried to move away from, according to McCarthy. This type of shift would be an open acknowledgment by Chinese leaders that Xi's efforts to transition away from that growth model is failing, he says.
Instead, McCarthy says, it's more likely that the government will issue $2 trillion to $3 trillion in bonds to raise money for local governments to implement fiscal spending.
Craig Allen, head of the US-China Business Council, is focused more on where any government spending goes. Efforts to jump-start structural reform and create social safety nets, such as increasing pensions, providing rural Chinese with healthcare, or creating unemployment insurance, would be cheered -- and nudge Chinese households to tap the mountain of savings they have accumulated. In the first half of this year, Chinese households added 9.27 trillion renminbi ($1.32 trillion) in new deposits into savings.
Some global investors worry about the challenge ahead. Consumer and business confidence continues to deteriorate as job losses continue to pile up and prices tumble. The property market -- which holds 70% of household wealth -- also remains mired in a multidecade slump.
"I was shocked at how despondent companies were. They had no enthusiasm, " says Wasatch's Ajay Krishnan, who was visiting China when the government stimulus was announced. "The government wants to rekindle [sentiment], but I don't' know if it will happen. People just aren't spending and aren't optimistic about their prospects and jobs."
China watchers are monitoring a handful of metrics -- such as new home purchases, credit growth, and the trajectory of the country's core consumer price index -- to gauge whether Beijing's efforts actually gain traction.
For those focusing on the short term, the market could still have legs, especially as investors who missed the swift surge higher use pullbacks to add back some China exposure after owning less than the emerging markets benchmark.
"We don't need China to solve all its problems before allocating more assets to China," says Gavekal Research's Andrew Batson. "As long as the government is doing more than people thought, it's positive for growth and equity prices."
