China market rally belies deglobalization concerns

After a day that saw US-listed Chinese stocks soar 33 percent higher and the Hang Seng Technology Index posted its biggest gain of the day, a veteran Asian investor called one of the world’s largest hedge funds last Thursday to announce a turning point.

The scale of the rally was welcome and impressive, he said, but its propellant — a Commitment from the top of the Chinese Communist Party introducing a series of “market-friendly measures” and having them promptly endorsed by other senior government bodies – has had a huge impact.

For the first time, in his view, the left and right hands of China’s policy-making and market management seemed to be working together in harmony, signaling a major shift in direction. He may be right. But the question is whether that matters much if the global economy decouples.

For an optimist, the statement on Wednesday is sufficient Liu Er, President Xi Jinping’s closest economic adviser, was encouraging. It implied that after last year’s grueling clashes between the state and stock exchanges, a compromise has been reached between Xi’s “shared prosperity” rhetoric and a recognition that market confidence is simultaneously desirable and fragile.

Apparently, those accommodations came from Xi himself and included some admission that a continued glow around the world’s second-largest stock market could have political value in these troubled times.

Tech stocks, led by Alibaba, rallied the most on Liu’s list of market picks, in part because the sector was the strongest painfully bludgeoned by China’s recent actions and in part because promises of an agreement between Beijing and Washington on the regulation of US-listed Chinese companies should boost valuations across the board.

Caught in the whirlpool was a JPMorgan Chase report Last Monday, more than two dozen prominent Chinese internet stocks were downgraded and the basket was described as “unattractive, with no short-term valuation support.” The report was mocked because of the rally days later. Another theory is that the report’s notoriety and negative tone helped push Beijing into declaring a floor sooner rather than later.

However, a number of factors stand in the way of the optimistic assessment of China’s move. JPMorgan’s note emerged from a notably difficult period for Chinese equities — a protracted sell-off that had pushed valuations well below their February 2021 peak. The Russian invasion of Ukraine and the associated geopolitical turbulence ensured that the downward spiral was barely visibly slowed down. China’s move, in this context, was less of a major rethink and more of a kill switch triggered when policymakers reached their breaking point.

As traders pointed out, Thursday’s rally was driven by hedge funds and pressure on short sellers. The long-only money – domestic and foreign – has yet to make definitive bets. Adding to his reluctance, signals from Liu and the Financial Stability and Development Committee he chairs have met with near-silence from tech companies and others. The market rally shows the joy of someone who has been told his dismal looking medical condition is easily treatable; the reaction of the companies is more of a “fool me once” fever.

However, a dynamic looms over it that Beijing cannot change. While Chinese confidence-boosting spasms are rare, they are not unprecedented. They have parallels with the successful experiments after the global financial crisis and after 2014, when panic took hold around domestic growth or the US trade wars.

On previous occasions, however, the Chinese confidence boost has been fired into markets where globalization still seemed fundamentally unstoppable and decoupling seemed a distant risk. Neither can be said with confidence now.

Even before the invasion of Ukraine fueled concerns about deglobalization and decoupling, technology nationalism, supply chain reorganization, and other megatrends reversed Calculations about investing in Chinese stocks. The ambiguities surrounding Beijing’s positioning towards Moscow have not abated. Xi’s comments on Friday in a conversation with US President Joe Biden that the international community “should work for peace and tranquility” were superficially reassuring but are unlikely to quash underlying concerns about decoupling. There are still many valid excuses for investors being cautious about China.

Beijing’s actions over the past week are important in neutralizing some of the more idiosyncratic domestic policy concerns hitting certain sectors of the stock market. However, this leaves the Chinese market as a more direct indicator of investors’ views on the future of globalization. China market rally belies deglobalization concerns

Adam Bradshaw

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