Chinese equity markets have been on a wild ride this year, going from what many considered “un-investable” at the beginning of the year to recent commentary from famed hedge fund manager David Tepper, who stated he is “buying everything” in China. While money managers often like to talk their book, sentiment in China has clearly improved on the back of recent monetary and fiscal stimulus announcements.  

The People’s Bank of China (PBOC) cut reserve requirement ratios (RRR) by 0.5% and their main policy rates by 0.2%, while noting another RRR reduction could be on the table by year-end. These moves support increased loan demand and help banks free up funds for lending. Policymakers also cut mortgage rates for existing homes by around 0.5% and reduced the minimum down payment requirements for first-time and secondary home buyers. Furthermore, the PBOC increased the share of principal it would cover on local government loans used to purchase unsold properties to 100% from 60%.  Finally, they created a new funding facility to boost buyback activity in equity markets.  

On the fiscal side, the Politburo — China’s highest political body of the Communist Party — pledged it would unleash the “necessary spending” to meet this year’s economic growth target of 5%. In addition to rolling out plans to increase consumer spending and renew consumer confidence, they specifically called out their commitment to “halting the declines” in the housing market.  

The message was well received as investors had been patiently waiting for a firmer policy response from Beijing. While there is still debate over whether these measures will be sufficient to revive their beleaguered economy, policymakers' “do whatever it takes” tone was enough to bring buyers back into the market.  

As highlighted below, the MSCI China Index has rallied over 30% in the last two weeks, giving credence to the adage that markets stop panicking when policymakers do. The rally was broad-based and supported by above-average volume. Over 75% of index constituents are trading back above their 200-day moving average (dma), while 87% also registered new four-week highs. Regarding upside, the next resistance hurdles for the index to clear set up near 70 (2018/2019/2020 lows) and 77 (June 2022 highs). On a shorter-term basis, price action is extremely overbought, and a pullback would not be surprising, but it’s important to remember overbought does not always mean a rally is over, especially when there is the potential for significant short covering. According to the latest Bank of America Fund Manager Survey, short China was the second most crowded trade last month, coming in behind long positioning in the Magnificent Seven stocks.  

Broad-Based Buying Pressure Supports Breakout in China

Source: LPL Research, Bloomberg 10/03/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.  

Stocks in China are not the only thing bouncing higher. The array of monetary policy support from the PBOC and the Politburo’s pledge for fiscal support also sparked a rally higher in Chinese yields. Benchmark 10-year yields are up nearly 0.15% over the last week as traders priced in an improving growth outlook.  

Technically, yields climbed above resistance off the August lows (2.12%) but have stopped short of reversing a downtrend (a close above 2.24% would suggest a new uptrend is developing). Momentum indicators are also improving. As featured in the bottom panel in the chart below, the positive directional movement indicator (+DMI) recently crossed above the negative directional movement indicator (-DMI), a bullish signal for trend direction, especially when the black Average Directional Index (ADX) is above 25, a bullish sign for trend strength. 

Yields are Responding 

Source: LPL Research, Bloomberg 10/03/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.  

Summary

Significant stimulus measures in China have helped restore much-needed investor confidence in China. While the economy will need to respond accordingly, investors have responded by bidding stocks out of a bear market. The bounce higher in Chinese 10-year sovereign yields suggests the fixed income market is also repricing an improving growth outlook. On a relative basis, China has made progress when compared to U.S. equity markets, but there is insufficient technical evidence suggesting a trend change toward sustainable China leadership is imminent.  

LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains a regional preference for U.S. markets over developed international and emerging markets (EM) due largely to superior earnings and economic growth in the U.S. and significant volatility in the Japanese yen. STAAC maintains a neutral stance on equities, though, with a slightly negative bias in the very short term based on the S&P 500 approaching overbought levels with deviating market breadth, historical seasonal weakness in October during election years, and political and geopolitical uncertainty. The STAAC expects volatility to remain elevated in the coming months as the market waits for more clarity on the economy, elections, and a better seasonal setup. For fixed income, the STAAC recommends a modest overweight, funded from cash, with an up-in-quality approach and benchmark-level interest rate sensitivity.