Politburo Brightens Mood for China Stocks After Gloomy Month

(Bloomberg) -- China's beleaguered stock market got a much-needed boost as the nation's top leaders vowed more economic stimulus. Whether that has staying power remains to be seen.

As the worst April since 2010 drew to a close on Friday, equities markets welcomed pledges by the Communist Party's Politburo to meet a 5.5% growth goal as well as to support the battered tech sector. The vows added to a series of policy measures since mid-March, which had so far brought only fleeting gains.

Shares across Hong Kong and China soared, with a tech gauge jumping by the most in six weeks. Traders chose to focus on potential boosts from higher infrastructure spending to looser tech regulations, instead of obsessing over Covid lockdowns that have stifled growth and dampened sentiment in recent weeks.

“The meeting addressed most of the pressing issues in the economy and is intended to boost confidence and turn around negative sentiment,” said Xiong Yuan, chief economist at Guosheng Securities. “It's a rare exception that the Politburo publishes the statement during the trading day. Clearly it's meant to incentivize investors to hold on to positions ahead of the holiday.

China's top leaders responded to calls from investors and analysts alike to revive an economy hurt by Covid lockdowns that this week spread to Beijing and Yiwu, disrupting business operations and roiling global supply chains. The Politburo's readout -- which was released at the earliest time of day of any since at least January 2017 -- came ahead of a five-day break for onshore markets.

While headwinds for China's economy and markets still remain, in particular the government's adherence to Covid Zero, traders are now asking whether this can be the long-awaited market bottom. 

The CSI 300 Index jumped 2.4% Friday, trimming this year's loss to 19%. That still makes it one of the world's worst performing national benchmarks, far outpacing the 13% decline in MSCI Inc.'s Asia Pacific gauge.

Attractive Valuations

To be sure, corporate fundamentals are weakening. Wall Street banks have started cutting profit estimates for Chinese companies, citing the fallout from Covid-19 lockdowns. Morgan Stanley expects profit growth for the CSI 300 Index at 12%, four percentage points below consensus. Firms on the CSI gauge are reporting the smallest upside surprise in sales since the first quarter last year, Bloomberg data showed.

“We are cautious for the next two quarters' earnings as long as the domestic Covid-zero policy is applied to more mainland cities,” said Alan Wang, equities portfolio manager at Principal Global Investors. “Global and domestic liquidity flows are not favoring Chinese equities for now.”

The latest policy commitment, though, is strengthening the case for some international money managers to stick with China, especially given the intensity of the selloff. The valuation gap between the MSCI China Index and global peers is nearing a record. The Shanghai Composite is trading at just 1.4 times current book value, and 15% lower than the average in the past decade. Meanwhile, the ChiNext Index is trading at 26 times forward earnings and around 50% discount from a peak early last year.

“Those who buy in the second quarter will very likely reap rewards in the third,” China Securities Co. Chief Strategist Chen Guo wrote in a note this week. “Sentiment cannot be worse than it is right now.”

©2022 Bloomberg L.P.

With assistance from Bloomberg