Policy makers also signaled there was progress with the Securities and Exchange Commission on a plan to address a standoff as the SEC moves ahead with plans to delist companies that don’t meet its auditing requirements. Beijing also said it supports all types of companies that list abroad—a comment that could placate investors spooked by the messy debut and then delisting by DiDi Globalafter it ran afoul of Chinese regulators.In one fell swoop, China’s regulators tried to wave away the biggest concerns that have weighed down its market—its crackdown on internet companies and the property sector, worries about the fate of offshore listings and its economic slump—and tried to bring the stability policy makers have prioritized this year ahead of the 20th Party Congress to a market that has been under duress.
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“The statement suggests a high degree of concern over the underlying state of the economy, a step up in fiscal, monetary and crucially property sector easing and increased efforts to limit equity market decline, which will include a slowdown in internet company regulation,” says TS Lombard Chief China economist Rory Green via email.
Though light on specifics, the comments were enough to send stocks on a tear and were reminiscent of 2015, when Beijing ramped up stimulus and lent money to brokerages to buy stocks in a bid to stave off a deep decline amid concerns about its economy. TheiShares MSCI China exchange-traded fund (MCHI) soared 11% in morning trade while theKraneShares CSI China Internet ETF (KWEB) soared 21%, retracing its losses of the last week. Even theInvesco Golden Dragon China ETF (PGJ) logged a gain of 26%, also retracing its sharp losses of the last week as investors worried about potential delistings of U.S.-listed companies.The comments mark an “important re-set” in terms of demonstrating policy makers still care about the market after a turbulent year that left some investors wondering if China was still investible, says Michael Kelly, global head of Multi-Asset strategies for PineBridge Investments. But it also starts the clock ticking for Beijing to “show us that they care”with stimulus, Kelly adds.Internet stocks, especially, got some reprieve as policy makers signaled the tech crackdown could be nearing an end—a welcome sign for bargain hunters in at least the biggest and more profitable internet giants like Alibaba Group Holding (BABA) and Tencent Holdings (700. Hong Kong) that had fallen to increasingly attractive levels. Indeed, Alibaba’s shares rose 22%, though are still down 21% this year.
But while battered Internet stocks could see a hefty bounce, some longer-term investors favor other parts of the market. GQG Partners Chairman Rajiv Jain says he still favors more cyclical companies, including China Merchants Bank(600036.China), which should benefit from loan growth,and even PetroChina(PTR) that stand to benefit from Beijing’s efforts to stimulate the economy or the favorable outlook for oil prices, even if the war in Russia ends since sanctions are unlikely to be removed.Given the changing backdrop in terms of inflation and monetary policy, as well as structural issues still facing many of these large internet platform companies, Jain sees more cyclical companies taking leadership if the market moves higher.
For example, regulation has hampered Tencent’s fintech business and new games still haven’t been approved while other internet companies are facing pressure as employees push to unionize. Though Beijing may be dialing back its crackdowns, its push for common prosperity—and a more level playing field—still holds, potentially limiting the bounce in internet companies and the multiples these companies could fetch.
While China’s comments about making progress with U.S. regulators on onshore listings may dial down the panic around U.S.-listed Chinese stocks, Jain notes that the move out of ADRs by larger investors is already a “fate accompli.” Plus, Chinese companies face a difficult backdrop for raising money in the U.S. and bipartisan support for a tougher stance against China. Chinese companies that haven’t already sought listings in Hong Kong are likely to still do so.
For those keeping score at home, the unexpected intervention that sent Chinese stocks soaring on Wednesday bears some similarities to the unexpected draconian intervention last year that sent stocks tumbling as Beijing essentially turned for-profit after-school tutoring companies into nonprofits.
The ability of the state to radically change the direction of the market, as well as the continued geopolitical risks that China could get hit by secondary sanctions by the West based on how Beijing plays its neutral stance in Russia’s war on Ukraine could limit gains.
Still to be seen: Whether China’s actions in terms of stimulus match up with today’s words of comfort.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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