Ben Laidler, global markets strategist at trading and investment platform eToro, discusses next week's annual Chinese legislative sessions. In his view, “they are decisive for the nascent rally in Chinese stocks and for investors' hopes for broader political stimulus, as authorities move from combating symptoms of stock market weakness with sales bans. short and similar, to the causes of the decline in property, confidence and manufacturing.
China's 'two sessions' are decisive catalyst
POLICY:
Next week's annual legislative sessions are crucial for the nascent rally in Chinese stocks and for investors' hopes for broader political stimulus, as authorities shift from combating signs of stock market weakness, with bans on short selling and the like, to the causes of the decline in ownership, confidence and manufacturing.
However, they will have to refrain from applying stimuli like those of 2008, which could aggravate the problems of debt, excess capacity and deflation. We see an ambitious 5% GDP growth target and more fiscal support, enough to boost low expectations and valuations, but not a big change. The world will be watching, from Australia and Germany to luxury and automobiles.
TWO SESSIONS:
The Chinese People's Political Consultative Conference (CPPCC), China's highest political consultative body, begins its annual session on March 4 in Beijing. The legislative branch, the Popular Assembly (APN), begins on March 5. These "two sessions" will set the GDP growth target and fiscal targets. The GDP target is likely to be "around 5%", similar to the 5.2% achieved last year, but above the consensus of 4.6% for Chinese GDP this year. The authorities intend to achieve three things:
1) Safeguard growth, since PMIs flirt with contraction.
2) Stabilize the oversized real estate market after three years of forced deleveraging.
3) Restore consumer confidence, which is now the main economic engine, but which has 60% of its wealth in properties, a proportion that is double that of the United States.
PERSPECTIVES:
Chinese stocks (MCHI) have sharply lagged the S&P 500 by more than 90 points since their January 2021 peak (see chart) and are flat against 14x GDP growth over the longer term.
The opposite bullish case is based on an attractive confluence of:
1) cheap and ridiculous valuations <10x PER.
2) Terrible investor sentiment, both foreign and dominant local retailers.
3) The authorities' new commitment to stabilize the real estate market and boost consumer confidence, with its unique policy of supporting a 35% savings rate, state-controlled banks and capital controls.
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