Best to Forget China's Stimulus Policies

The policy-driven rallies often turned head fakes in recent years

It’s best for the market to forget China’s stimulus package, i.e. the “government put option”. Investors are often overly optimistic about the size and effectiveness of China’s stimulus. Times have changed.

The best policy expectation is no expectation. Any investment thesis on China should not rely on policy alone. This is consistent with our analytical framework on the macro and policy risks in China.

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China markets had another policy-fueled rally this week, with both the CSI 300 Index (A-shares) and Hang Seng Index (H-shares) up around 4.5% WTD (as of July 28, 2023). Chinese real estate stocks in particular had a roller coaster ride.

OK, wrong picture perhaps. Here is the stock chart of Country Garden (2007.HK), one of the largest private developers in China. Prior to this week’s rally, the stock was down more than 10% in July, then gained 27% for the week!

All the hype is because China’s Politburo meeting set a “pro-growth” tone to support the economy.

Here is a China ETF analysis based on the latest meeting, from the Seeking Alpha investor community.

No Sense of Crisis

One reason I am skeptical of how far China will go to save the economy: I am not sure if the top leadership gets that the Chinese economy is in big trouble, and requires more drastic measures than what we have today. Cheerleading articles like the following are still up and running on China Daily’s website. This type of rhetoric offers a false sense of security and doesn’t help anyone. BTW, Credit Suisse is already finished.