China's Pivot

Chinese stocks have had a phenomenal run over the last two weeks. The Hang Seng index is over 22% higher than a low struck in late October. And some of the big outperformers were in the battered property sector.

There are a few likely catalysts for the rally. The first was a series of measures which suggested some softening of China’s zero covid stance. Quarantine measures were eased, as were travel restrictions. These measures came off the back rumours circulated on social media that a committee was being set up to prepare for re-opening in March. Another factor was news first published by Bloomberg, revealing that regulators were issuing a “sweeping” new rescue package for the property sector.

Some of these recent measures suggest some shift towards supporting the economy in the near term. They impact the two most significant headwinds for China’s economy today.

However, at first glance, they do not appear to be game changers for China’s economy.

Zero covid has not been abandoned, despite some tweaks. Moreover, rising cases across the country, including Guangzhou and Beijing, has meant that lockdowns are still ongoing and remain a strategy to keep virus numbers in check.

Meanwhile, the measures for the property market were supportive, and can mostly help by resolving immediate liquidity issues among cash-strapped developers. To arrest the downturn in the sector, it will require a turnaround in confidence among homebuyers and investors. Homebuyers so that sales revenue will stabilise, and investors to enable refinancing of developers’ debt. It’s not clear that the plan will achieve this, and unlikely to prevent further weakness in the sector over the longer-term.

Finally, when it comes to the rumours, we have yet, and are unlikely to receive any official confirmation, even if they were true.

So, why such a strong market reaction?

The measures do signify a shift from zero covid at all costs. Additionally, there has previously been a reluctance to provide comprehensive support to the property sector given the concern of reverting back to the days of extensive leverage in the sector. So, the most recent plan suggests a wider attempt to provide support to the property sector.

And after heavy selloffs so far this year, financial market participants are looking for an excuse to buy in. It is analogous to the pivot by central banks in the West - investors are simply latching onto positive news.

But much like the central bank pivot by the US Federal Reserve, expectation would need to be followed up by action if a rally is to be sustained. Specifically, markets will need further confirmation that China will move away from disruptive lockdowns.

At some point, that is a realistic possibility. If there was a further shift away from zero covid, or an exit strategy to be developed, possible timing would be March, when annual parliamentary sessions are scheduled.

We will also need to see a tangible turnaround in the property sector, home sales and prices stabilise, proper access to credit for developers and investors returning to the market. Whether measures to date are enough remains to be seen. We should keep in mind that confidence among households with regards to the housing market has been low, so it will take a major turnaround to bring potential homebuyers back.

A recovery in China’s economy was always in prospect upon a re-opening from covid restrictions. Events over the past few weeks suggest some light at the end of the tunnel in this respect.

How much other support will be given in the near-term is uncertain, particularly when efforts to boost the economy through infrastructure and property would undermine rebalancing efforts down the track. Key to watch out for is next year’s economic growth target, which will help determine how much support will be given. That is, if authorities even choose to have one at all.