When the week started, JPMorgan Chase & Co analysts said that China’s internet stocks were “uninvestable”. The world is in a different place now.
Following a series of interventions by Beijing, the worst sell-off in Chinese markets since 2008 turned into a surge, catapulting the country’s US-listed technology firms into a rebound not seen before.
For investors, the question is whether the rally will hold, turning the world’s second-biggest economy into a haven for traders and a life raft for global output at a time of concerns over a broad slowdown.
The best answer from strategists is that it could.
Even the perpetually pessimistic Bank of America team said on Friday that China’s “verbal intervention” could become a “bull driver” for a spring rally if policy stimulus ends the country’s growth downgrades and puts a floor on global economic output estimates.
“The market was indeed oversold, irrational, in the dramatic rout, so the real money is back doing bottom-fishing,” said Castor Pang, head of research at Core Pacific Yamaichi.
For Christophe Barraud – one of the leading forecasters for the Chinese economy according to Bloomberg’s rankings – a confluence of factors showed why the country felt compelled to act.
The lockdown in Shenzhen on Monday, a technology centre province of 24 million, tested the country’s zero-Covid policy at the same time as a hit to foreign demand came from the conflict in Ukraine.
That threatened to derail China’s economic growth target just as President Xi Jinping prepares for re-election, according to Mr Barraud, chief economist at Market Securities.
China’s highest financial policy committee swung into action. It vowed to ease a crackdown on technology firms, to support the battered real-estate market and stimulate the economy.
The pledge followed a prolonged squeeze on financing for property developers and a sweeping regulatory campaign aimed at internet companies such as Alibaba Group Holding and Tencent Holdings.
That was swiftly followed by the country’s central bank intervening to weaken the yuan and the government distancing itself from Russia’s attack on Ukraine to minimise the risk of drawing President Joe Biden’s ire and potential US sanctions.
Mr Xi then signalled a shift in a long-standing Covid-fighting strategy by pledging to reduce its economic impact.
The announcements amount to a “a Draghi moment”, Shanti Kelemen, chief investment officer at M&G Wealth said on Bloomberg TV, referring to the former European Central Bank president Mario Draghi, whose pledge to do “whatever it takes” to save the euro area turned the fortunes of the currency bloc during the sovereign debt crisis a decade ago.
After Beijing’s pledge, the Nasdaq Golden Dragon China Index rose by 33 per cent, its biggest jump yet. That still left the value of US-listed Chinese companies well below their historic records.
For optimists, the rally still has legs, offering traders a recourse just as developed markets in Europe and the US face the prospect of higher interest rates, and the wind-down of the monetary and fiscal stimulus measures that fuelled last year’s ferocious rally.
Goldman Sachs Group strategists recommend an overweight position on Chinese equities, citing the country’s well-anchored growth targets and low investor positioning.
And, in an ad hoc meeting this week, Credit Suisse’s investment committee increased its exposure to Chinese equities into overweight.
China going into expansionary mode can only help, Mr Barraud said.
“I expect monetary policy to be more accommodative and fiscal policy to be supportive especially for SMEs, which are not able to pass costs on consumers,” he said, adding that Chinese equities have low valuations and may enjoy relief from the easing of regulatory pressure.
Chinese stocks had almost always traded at a hefty premium to Europe and the US, but the rout of the past few months wiped out most of it.
At one point this week, the Dragon Index was trading at 13 times forward earnings, a far cry from 40 times in June 2021, just when Beijing had started its scrutiny of internet companies.
“Look at Alibaba, you got a value and price mismatch,” said Justin Tang, head of Asian Research at United First Partners in Singapore. “You are buying good value but when will price reflect that value? That will take some time.”
Sceptics remain unconvinced by the valuation argument. As risks abound globally, the policy predictability of developed markets outshines the attractive valuations found in economies such as China, they say.
Take Russia, for example. In a note on February 7, JPMorgan strategists recommended an overweight position, citing attractive valuations.
“We see 2022 presenting a supportive backdrop for equities” in Russia, “driven by easy monetary policy, pace in the vaccine roll-out strategy, and above-trend growth,” strategists led by Mislav Matejka wrote.
Fast-forward a few weeks and investors are sitting on Russian assets that could be entirely wiped out amid a wave of sanctions.
China’s ties with Russian President Vladimir Putin could yet draw new US sanctions, although the likelihood of it siding unequivocally with Russia in Ukraine conflict is very small, said Jason Hsu, chairman and chief investment officer of Rayliant Global Advisors.
“The US and China will be ‘frenemies’ – they can disagree in the politics and agree on the business, and the economies are still doing okay, that’s the preferred relationship for investors,” said Olivier d’Assier, head of Asia-Pacific applied research at Qontigo.
But such bets of predictability and stability have proved wrong before, with US-listed Chinese tech stocks erasing more than a decade of gains before this week’s rebound.
Also, headwinds remain. China’s lockdowns with each coronavirus flare up, potential capital outflows due to the Federal Reserve’s rate rises and a sluggish property market cloud the outlook.