The Shanghai Composite Stock Index ($CHSC) experienced a remarkable rally, surging more than +2% today to reach a 1-week high. The surge was triggered by an unexpected dovish tone set during this week's Politburo meeting in China. The 24-member Politburo, led by President Xi Jinping, outlined "counter-cyclical" policies, fueling optimism in the market and leading to a widespread rally in property stocks, tech companies, and retailers.
The crucial question at this juncture is whether the government's efforts to boost economic growth will translate into a sustained stock market rally. In the past, China saw fleeting periods of positivity in its equities as it emerged from stringent Covid restrictions. However, these gains were short-lived, as investors were left disappointed by the lack of robust measures from the authorities to stimulate growth. Fidelity International remarked, "Markets have been disillusioned as they expected faster improvements, but they are now adjusting their growth expectations. We believe that this relatively uninspiring period will eventually give way to a more positive market sentiment."
Today's rally in China's Shanghai Composite Index was comprehensive, with substantial gains seen in property stocks and retailers. The Politburo's focus on the property sector, which accounts for nearly 20% of China's GDP when related industries are factored in, contributed to the upswing. The Politburo signaled an "adjustment" of restrictions in the property sector and expressed the intention to "optimize property policies timely." This move prompted a surge in property stocks, providing a sigh of relief to investors. However, there remains a need for tangible measures to be introduced in the near future. Malayan Banking Bhd noted, "While these acknowledgments are significant, concrete measures will be eagerly awaited."
Despite the positive signals, some analysts maintain a sense of skepticism, drawing parallels with previous situations. Leuthold Group commented, "We have seen this movie before. The recent policy signal from the Politburo is not surprising, given the credit/liquidity crunch faced by Chinese property companies." Citigroup also expressed concern, reporting that investor sentiment has turned increasingly negative for Chinese onshore shares, and bearishness has become pronounced across the indexes they track.
The markets appear hesitant to fully embrace the rally in Chinese stocks until there is a tangible improvement in the economy. Reports from last week revealed a loss of momentum in China's economy during Q2, with weakened consumer spending and a decline in property investments. Moreover, China's home sales in June dropped, ending a four-month rebound. There are concerns that today's stock rally may only be a result of short covering and may not be sustainable. Saxo Capital Markets HK Ltd pointed out, "The Politburo's actions were somewhat lukewarm, but sufficient to attract some investors back to the market and prompt traders to close shorts."
In conclusion, while China's economic policies have generated a significant growth rebound in the stock market, doubts persist about the sustainability of this rally until the broader economy demonstrates substantial signs of improvement. Investors and analysts are cautiously optimistic but await concrete measures to be taken to bolster the market's confidence in the long term.