After a day when US-listed Chinese stocks exploded 33 percent and the Hang Seng Technology Index posted its biggest one-day gain ever, an experienced Asian investor at one of the world’s largest hedge funds called a turning point last Thursday.
The size of the meeting was welcome and impressive, he said, but its thrust — a pledge from the Chinese Communist Party’s top to introduce a series of “market-enhancing policies” and immediate approval by other senior government bodies — with enormous consequences.
According to him, for the first time, the left and right hands of China’s policy-making and market management appeared to be working in harmony and signaling a major change of course. He may be right. But the question is whether that matters much if the global economy decouples.
For an optimist, Wednesday’s statement from Liu He, President Xi Jinping’s closest economic adviser, was encouraging. It implied that, after last year’s blood-curdling clashes between the state and the stock market, a settlement had been reached between Xi’s rhetoric of “common prosperity” and the recognition that market confidence is both desirable and fragile.
Seemingly, this adjustment came from Xi himself and implied some acknowledgment that a long-lasting glow around the world’s second-largest stock market may have political value in these troubled times.
Technology stocks led by Alibaba rose the most on Liu’s list of market ointments, partly because the sector had been most painfully knocked down by China’s recent measures, and partly because the promise of an agreement between Beijing and Washington to regulate US-listed Chinese companies should more generally enforce valuations.
Into the maelstrom last Monday came a JPMorgan Chase report that downgraded more than two dozen prominent Chinese internet stocks, describing the basket as “unappealing, with no near-term valuation support.” The report was laughed at because of the rally a few days later. Another theory is that the notoriety and negative tone of the report led Beijing to announce a floor sooner or later.
However, a number of factors stand against the optimistic view of China’s move. JPMorgan’s note stemmed from a remarkably difficult period for Chinese stocks – a protracted sell-off that had pushed valuations well below their February 2021 peak. The Russian invasion of Ukraine, along with the accompanying geopolitical turmoil, meant there were few visible brakes on the downward spiral. In that context, China’s move was not so much a major shift in mindset as an emergency circuit breaker that was tripped when policymakers reached their pain threshold.
As traders noted, Thursday’s rally was driven by hedge funds and pressure on short sellers. The only long money – foreign and domestic – has yet to make final bets. Adding to the hesitation is that signals from Liu and the Financial Stability and Development Committee of which he chairs have been almost completely silenced by the tech and other companies. The market rally charts the joy of someone being told their grim medical condition is easily treatable; the companies response is more of a “fool me once” glow.
But looming above that is a dynamic that Beijing cannot change. While Chinese confidence-building spasms are rare, they are not unprecedented. They have parallels in the successful experiments after the global financial crisis and after 2014, when panic related to domestic growth or US trade wars struck.
However, on previous occasions, the Chinese confidence booster has fired into markets where globalization still felt fundamentally unstoppable and decoupling seemed a small risk. Neither can be said with confidence now.
Even before the invasion of Ukraine exacerbated deglobalization and decoupling, technological nationalism, supply chain redesign and other megatrends had reconsidered investment calculations in Chinese stocks. The ambiguities about Beijing’s positioning vis-à-vis Moscow have not diminished. Xi’s comments on Friday in a conversation with US President Joe Biden that the international community “should work for peace and tranquility” were superficially soothing, but are unlikely to subside the underlying concern about disconnection. Investor reluctance towards China still has plenty of valid excuses.
Beijing’s actions last week are important in neutralizing some of the more idiosyncratic domestic policy concerns that hit certain sectors of the stock market. But that leaves the Chinese market as a more direct proxy for investors’ views on the future of globalization.
This post Chinese market rally obscures concerns about deglobalization was original published at “https://www.ft.com/content/88952aee-d0e4-4952-9b11-f93ef610a0ca”