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Are Chinese Stocks Set to Pop?

Are Chinese Stocks Set to Pop?

Chinese stocks may soon begin to outperform the global benchmark.  China has begun to ease monetary policy, which has historically benefited Chinese stocks.  That’s the view posed in Charles Schwab’s December 2, 2011 ‘Market Insight Alert’ by Liz Ann Sonders, Chief Investment Strategist, Brand Sorensen, CFA and Michelle Gibley, CFA.  Here’s an excerpt:

China makes a proactive move

While a recession in Europe is more a question of “how steep” rather than “if,” we are less concerned about a hard landing in China.  Growth in China is slowing and China’s exports in September and October have already been hurt by the slowdown in Europe. Additional pressure on the Chinese economy has come in the form of reduced access to credit and the reduction of infrastructure spending. Lastly, while housing sales have dropped off, construction has continued, but we expect this to wane in the future.

However, there are still ways China’s growth will be supported in the future:

  • Exports to Europe represent only 5% of China’s nominal GDP; about the same as exports to the United States, where growth appears to be stronger.
  • China’s wage increases have resulted in its consumers continuing to spend and travel.
  • Affordable housing construction is a high priority Chinese government project.
  • Targeted stimulus measures have begun, including tax cuts and eased credit access for small businesses; as well as hints of another round of infrastructure spending, likely targeted at the underdeveloped inland provinces.

The most significant signal for a return to growth in China was the easing of the required reserve ratio for banks at the end of November. This is a sharp turnaround from a prior focus on inflation, with the reduction in both commodity prices and global economic growth estimates giving the Chinese central bank the leeway to ease monetary policy. As a result, the lending freeze is likely to thaw; and while near-term growth will continue its downward momentum, it will provide a stimulus for future growth.

Significantly for investors, Chinese stocks tend to move in anticipation of policy moves. Chinese stocks have underperformed other global markets since late 2009 in anticipation of tighter financial conditions, but have recently moved sideways, believing tightening would not continue. Now that policymakers have made a decisive move, it is possible Chinese stocks could begin to outperform the global benchmark. Read “China Fear is a Potential Opportunity” for more.

         Chinese Stocks Tend to Outperform When Policy is about to Ease

Source:  FactSet, Shanghai Stock Exchange, People’s Bank of China. As of Nov. 29, 2011.  * Indexed to 100 as of January 1, 2008.  A larger/smaller number above 1 denotes greater outperformance / underperformance of the Shanghai Composite Index relative to the MSCI EAFE Index.

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