Even though new signs point to a continued economic slowdown in China, there are a few reasons the recent bull market in Chinese stocks could just be getting started.
That would be welcome news to investors, who were dealt another batch of gloomy headlines about China’s economy on Tuesday. Data showed China’s services sector grew at its slowest pace in four months, with the China Caixin services purchasing managers index slipping to 51.1 in February from 53.6 the previous month.
The data came as China’s legislature met for the annual 11-day National Party Congress session where Premier Li Keqiang reduced China’s economic growth target for 2019 to a range of 6% to 6.5% from 6.5% last year, a nod to the challenging economic backdrop. The last time it offered a range instead of a specific target was in 2016, after a major market decline and as growth took a hit.
But China also unveiled more measures on Tuesday to help its economy, which should help China’s stock market continue its upward run.
China is continuing its drip-drip of measures to help revive the economy, including a larger-than-expected cut in the value-added-tax, which should reduce the corporate tax burden by 750 billion to 820 billion renminbi. That should benefit the manufacturing, mining and retail sectors most, according to a note on Tuesday from Citi’s China economics and equities team.
The government also reiterated its push to reduce debt in its economy and its commitment to key technologies where China is fighting for dominance with the U.S., such as 5G and the industrial Internet of Things, which includes integrating technology to aid product development and to boost efficiency and decision-making.
“Overall, we sense the policy tone has turned much more market-friendly, after a harsh year of ‘deleveraging’ in 2018,” Citi equity strategist Jerry Peng wrote in a note to clients Tuesday.
The direct winners of some of the stimulus measures will be infrastructure-related stocks, like railway equipment makers like CRRC (601766. China) and cement maker Anhui Conch (600585. China), Peng wrote. On the industrial internet front, Citi tech analyst William Yang’s top picks include Alibaba (BABA), Kingdee International Software (0268. Hong Kong) and software developer and data infrastructure company GDS Holdings (GDS)—all three should benefit from the rise of artificial intelligence. Meanwhile, China Mobile (CHL) is a possible winner in 5G.
Technical factors suggest more gains, too, as Chinese stock indexes have crossed into bull market territory in recent weeks. The CSI 300, which tracks the largest stocks in the Shanghai and Shenzhen markets, is up 26% so far this year, while the MSCI iShares China ETF (MCHI) is up nearly 18%. In comparison, the typical Chinese bull market sees an average gain of 112% over 205 days, according to Bespoke Investment Group.
Market cycles in China are much shorter than the U.S., but the current bull market is still just a quarter of the way through its average length. While markets could return some of their gains in the short-term as they hit overbought levels, Bespoke co-founder Paul Hickey wrote in a Monday note that the long-term technical backdrop suggests there is plenty of room for further gains for Chinese stocks.
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