The US Federal Reserve is widely expected to finally take its foot off the interest rate brake this week, giving China’s central bank authorities room to act as well. By extension, the move in Washington DC could also mean good news for Chinese stocks. “US monetary easing could be a catalyst for a revaluation of growth sectors in Chinese markets, with growth outperforming value,” HSBC analysts said late last week, citing the higher price-to-earnings ratios they employ . I think stocks in China can do well. “We emphasize that earnings growth is key,” analysts led by Steven Sun, head of research at HSBC Qianhai Securities, wrote in the report. “We think growth sectors such as semiconductors and consumer electronics, which posted strong gains in the first half of 24, could outperform during the upcoming easing cycle.” High US interest rates relative to China have made it quite easy for global institutions to choose US government bonds over Chinese stocks. That includes Nvidia’s stock gains, which have surpassed 600% since the AI mania began less than two years ago. One Chinese city this summer reportedly became the largest investor in a Chinese fund that tracks the Nasdaq-100. More than lower interest rates needed Other global investors say Chinese stocks need more than simpler monetary policy to become truly attractive. “[T]The biggest drivers of global investors’ allocation decisions when it comes to the Chinese stock market are the [business] fundamentals” and macroeconomic conditions,” Laura Wang, China strategist at Morgan Stanley, said in a note in early September. Perhaps worryingly, she noted that Chinese stock valuations are not positively correlated with US Treasury yields in 2024. The iShares MSCI China ETF (MCHI) has stabilized this year and is up less than 1%, but has posted double-digit declines in each of its stocks. the past three years. “Chinese stocks are attractively priced from a valuation perspective,” Aaron Costello, regional head for Asia at Cambridge Associates, told CNBC earlier this month. They simply lack a catalyst. The “fundamental catalyst is profits,” he said, but the broader economy is languishing. “The problem here is deflationary pressures” remain intense. The main consumer price index, which excludes food and energy prices, rose just 0.3% in August from a year ago. In a rare public comment that showed the sense of urgency, former People’s Bank of China Governor Yi Gang said earlier this month that China should focus on fighting deflationary pressures. “It’s more than just real estate,” Costello said. “It’s a fundamental crisis of confidence in some ways.” The government can cut interest rates, but if households don’t want to spend the extra income, it won’t flow into the economy, he said. Hesitant capital spending Companies have also been cautious with their spending. While second-quarter profits improved from the first quarter, capital spending fell 4% in the first half of the year, the slowest since 2017, with industrial and renewable energy the biggest declines, says James Wang, head of China Strategy at UBS Investment Bank Research. This was stated in an investigative report on Thursday. Internet, consumer and auto companies reported relatively better results and profit forecasts, Wang added. UBS expects MSCI China earnings per share to grow 7% this year. Earlier this year, Governor Pan Gongsheng of the People’s Bank of China acknowledged that easing by the US Fed would create room for China to further cut interest rates. On the budget front, Beijing also issues ultra-long bonds, but has remained relatively conservative. “We think Chinese equity markets should benefit from lower Federal Fund rates and reduced currency pressure, especially if the U.S. economy does not fall into recession during the Fed’s rate-cutting cycle,” HSBC’s Sun said. “Specifically, our analysis indicates that the Wind All-A index and [Hang Seng China Enterprises Index] could generate average returns of 24.9% and 1.5% respectively in the 12 months following the Fed’s first rate cut, assuming there is no US recession,” the HSBC report said. In a search for stocks that could benefit from lower financing costs, an HSBC survey found that companies with high debt-to-asset ratios include Shenzhen-listed pork producer Muyuan Foods, and Shanghai-listed China Southern Airlines and Hengli Petrochemical, a refinery that is in talks to let Saudi Arabia’s Aramco take a 10% stake in The HSBC screen only looked at mainland Chinese stocks with, among other things, expected sales growth of more than 10% this years and a debt-to-asset ratio of more than 60%.
A Fed rate cut could help Chinese stocks. Or not.
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