China stock-market jump may be 'tradable rally' - but approach with caution

By William Watts

Post-COVID relief rallies have been 'fast, furious and short-lived', economist warns

Chinese stocks and the exchange-traded funds that track them surged Tuesday after Beijing announced the biggest stimulus package since the early days of the COVID pandemic, sparking what some analysts see as a tradable rally.

At the same time, volatility means it may be a rally that isn't for the faint of heart.

The iShares China Large Cap ETF FXI jumped 9.8% and the KraneShares CSI China Internet ETF KWEB advanced 10.4% Tuesday. Earlier, the CSI 300 Index XX:000300 rose 4.3% for its best day since March 2022, while Hong Kong's Hang Seng HK:HSI rose 4.1%. The CSI 300 remains down more than 2% for the year to date, while the Hang Seng has rallied around 11% in local currency terms. That compares to a 20% gain for the S&P 500 SPX.

People's Bank of China Gov. Pan Gongsheng, who announced that a short-term interest rate would be cut, the amount of capital banks were required to hold in reserve would be reduced, and there would be a batch of support for the beleaguered housing sector and the struggling equity market as the government strove to lift economic growth to its 5% annual target.

Jonathan Krinsky, chief market technician at BTIG, has taken a mostly contrarian and upbeat view on China over the last year. It's a trade that's generally worked out, but it's been a bumpy ride, he acknowledged in a Tuesday note. From the late-January lows to the mid-May highs, FXI gained 41%, then fell 17% into August, he noted, before the latest 22% rally to fresh 52-week highs. FXI is up 26% year to date, while KWEB has lagged with a gain of more than 11%, including Tuesday's rise.

"When we look at the big picture, we think there is still plenty of upside in this trade," he wrote.

"FXI has made a new 2024 high, and is close to clearing its August '23 high. Doing so would complete a fairly meaningful base, confirm its long-term double bottom, and suggest upside towards 40 (+32%)," he wrote (see chart above).

KWEB should have room back to its May high at 32.60 in the near term, with its 2023 highs of 36 above that, he said.

"It's always difficult to buy something after it has had a big move up. Often times the hardest trade is the correct trade, and we think that's the case here," Krinsky wrote. "A breakout worth chasing."

Observers warned, however, that volatility may remain the norm, extending a pattern of short-lived relief rallies seen since the COVID pandemic.

The true spark for the China stock rally came when Pan announced that if the stimulus measures proved successful, an additional 1.6 trillion yuan in funds would be made available, while also mentioning that a stock-market stabilization fund is under discussion, said Rory Green, chief China economist at TS Lombard, in a note, while observing that Pan didn't define what would qualify as a success.

PBOC involvement in equity markets, meanwhile, marks a clear departure from previous policy, he said. The central bank typically cautions against speculation but now seems to be encouraging it.

That suggests an "element of panic" among policymakers, he said, as they attempt to build confidence and foster wealth creation, or at least prevent further equity destruction.

It "points to a tradable rally in Chinese equities. Onshore stocks are a policy- and momentum-driven market, and policy signals don't get much clearer than this," Green wrote, but cautioned that in a macroeconomic environment that remains weak, the rally should be viewed as a trade rather than investment - and one that is best approached with caution.

Relief rallies since 2021 have been "fast and furious and ultimately short-lived," he said - a pattern that's likely to repeat without serious demand-side follow-through.

-William Watts

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09-24-24 1642ET

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