Investors are exhibiting decreased confidence regarding whether stimulus measures can effectively revive the Chinese economy from its downturn.
This week, Chinese stocks experienced a decline as investors speculated about the extent of stimulus the Chinese government might introduce. Concerns have also emerged about the path of inflation and the anticipated rate cuts by the Federal Reserve in the United States.
Shares of Baidu, a leading search engine and artificial intelligence company, fell over 11% as of late Thursday afternoon. Meanwhile, shares of e-commerce firms PDD Holdings and JD.com decreased by 14.6% and 11.4%, respectively.
Several weeks ago, China’s government and central bank announced new stimulus initiatives aimed at addressing weak consumer demand, a housing market decline, and high unemployment. These initiatives included reducing interest rates, mortgage rates, and bank reserve requirements, alongside plans to inject capital into financial companies. A surprise Politburo meeting emphasized the government’s commitment to these measures.
However, investor enthusiasm appears to be waning as recent press conferences have lacked detailed information and compelling measures to sustain market rallies. This trend persisted following a press conference today, where China’s Ministry of Housing and Urban-Rural Development disclosed plans to increase bank lending for certain property developments to over $560 billion by the end of the year, nearly doubling the prior amount. This announcement failed to captivate investors.
Macquarie China’s Chief Economist, Larry Hu, remarked that the housing support measures announced were incremental and might relieve developers’ financial stress but may not be sufficient to stabilize the housing market.
Chinese stocks may also be under pressure due to market uncertainty surrounding inflation trends and potential interest rate cuts by the Federal Reserve. Recent economic data, including job reports and the Consumer Price Index, have indicated a robust economy. Retail sales in September rose by 0.4%, surpassing both August figures and economists’ expectations. A strong economy reduces the likelihood of the Federal Reserve implementing anticipated rate cuts, impacting popular Chinese tech and growth stocks that would benefit from such measures.
Furthermore, the upcoming U.S. presidential election could impact Chinese stocks. Former President Donald Trump’s rising chances against Vice President Kamala Harris, according to betting markets, have stoked concerns. Trump has indicated plans to impose trade tariffs, which could reach as high as 60% on Chinese imports, if elected.
There is considerable potential in China, with companies like PDD, Baidu, and JD.com poised to benefit from a rebound in consumer demand. These companies are currently valued at 12 to 14 times their earnings, which is not considered overly expensive given their growth prospects and market potential.
However, uncertainty remains regarding the scope of stimulus measures and the implications of a potential Trump victory for China. It may not be advisable to attempt timing the market, and investing with a long-term perspective is suggested. Volatility is expected in the near term.
