There are two forces driving Chinese stocks:
- The PBoC is among the few major central banks that can engage in further monetary easing, and China’s ongoing fiscal stimulus programs will likely shift into high gear in the coming months. This, together with a stable household sector and service industries, should preclude major growth disappointments.
- But investors are no longer just worried about the growth slowdown. Even though the flash manufacturing PMI last week may have contributed to the selloff in Chinese shares, the growth slowdown is not new news, and should not have caused such dramatic market reactions. The new unknown is the Chinese authorities’ willingness and ability to keep things “under control”. Notoriously poor policy transparency has further worried investors, leaving fear and anxiety dominating sentiment. As a result, anything China related is aggressively liquidated.
Our China strategists expect that the growth outlook will eventually matter for stock prices from a cyclical point of view, but it will be an uphill battle for the Chinese authorities to regain credibility. Until then, the risk premium attached to Chinese equities will stay elevated.