China stocks’ 'policy put' is breaking down
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to add link and editing credits.
By Hudson Lockett
HONG KONG, July 24 (Reuters Breakingviews) -Chinese officials seem relatively untroubled about their country’s property market dysfunction, judging from their own list of top priorities. Of 60 policy goals from the recent Third Plenum leadership summit published on Sunday, the real estate sector is not mentioned until item 44 — and then in a single paragraph providing scant detail on how to address the top problem weighing on consumption in the $17 trillion economy. But if officials are content to leave the details for later, markets are less sanguine.
For investors, burned time and again by short-lived rallies spurred by hopes of policy support, the complexities of the China trade boil down to a simple reality: President Xi Jinping’s crackdown on leverage has torpedoed home prices, triggered a confidence crisis among homebuyers and left a hole in the country's growth outlook that has yet to be fully filled. The resulting drag has pulled down valuations for companies included in benchmarks such as the Shanghai Composite Index .SSEC and Shenzhen Component Index .SZI.
This is why every time policymakers hint that they are going to start making big moves to help the real estate sector, equities surge higher. They have also reliably walked back those gains. The most recent rally, which kicked off in March, has now fully unwound, leaving the country’s CSI 300 stock benchmark .CSI300 flat since January, while Hong Kong's Hang Seng Index .HSI is up just 2%, giving up a bull run. Cumulative net purchases of Chinese equities by offshore investors this year peaked at 96 billion yuan ($13.2 billion) in May, and 80% of that amount has since flowed back out.
The 3% fall by the CSI 300 this week suggests markets have little faith that Beijing will fill in the blanks left by the new plenum communique. When details do emerge, they may not have the impact top cadres anticipate. Trading cycles are getting shorter and more volatile, says a strategist at one large European lender who prefers to remain unnamed. He warns that officials’ failure to shore up China’s economy is undoing the old “policy put” of piling into equities in response to vows of imminent reform.
Fleeting rallies are likely to encourage hot money to jump in and out of the market to notch quick profits and avoid losses when officials make promises and then underwhelm on the follow through. That is precisely the sort of volatile scenario for markets Beijing wants dearly to avoid.
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CONTEXT NEWS
Chinese leaders ended their Third Plenum leadership summit on July 18, with official statements produced by the gathering reflecting greater urgency among top officials to boost economic growth.
China’s CSI 300 index has shed 3% since the plenum’s full readout over the weekend, leaving the equity benchmark flat this year. The economy grew 4.7% year-on-year in the second quarter, according to official data released on July 15.
Graphics: Global appetite for China stocks fades https://reut.rs/3yey9Gv
Graphics: Chinese equities have reversed Third Plenum gains https://reut.rs/3LDGg2E
Editing by Una Galani and Aditya Srivastav
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