China's rally still has 'more legs,' Goldman Sachs says

By Louis Goss

China's recent rally could still have "more legs" if it is in any way similar to the stimulus-fueled rallies that were seen during the COVID-19 pandemic and in the wake of the 2008 financial crash, Goldman Sachs strategists say.

The recent rally in Chinese equities that was sparked by the unleashing of a major stimulus package from the People's Bank of China on Sept. 24 has now become one of the sharpest and most concentrated rallies in Chinese market history.

The stimulus package saw the People's Bank of China cut interest rates by 50 basis points with a view to reinvigorating the world's second largest economy in the face of a slump caused by an ongoing crisis in China's heavily indebted property market.

The CSI 300 XX:000300 index, which tracks the top 300 stocks listed on the Shanghai and Shenzhen stock markets, advanced 24% in the week running from the unleashing of the People's Bank of China's stimulus package to when markets closed on Sept. 30.

The Shanghai Stock Exchange and the Shenzhen Stock Exchange are now both set to reopen on Tuesday, having closed on Oct 1. for the People's Republic of China's nationwide 'Golden Week' celebrations.

The Hang Seng index HK:HSI has continued to surge over the previous week as Hong Kong markets have stayed open during the PRC's Golden Week holiday.

The MSCI China index CL:MCHICL has also increased by 37% since hitting lows in mid-September.

China's previous market rallies have seen major increases in Chinese stock indexes over extended periods. The current rally could now continue in the same way, particularly if China follows through on its stimulus policies, Goldman Sachs' analysts, led by Kinger Lau, said.

The MSCI China Local Price index increased 147% over 277 days in the wake of the global financial crisis on the back of a -Yen4 trillion stimulus package unleashed by the Chinese government on Nov. 9 2008.

The unleashing of more stimulus measures from the People's Bank of China during COVID-19 saw the MSCI China Local Price index surge another 84% across a 240-day period from March 2020 to February 2021.

Chinese markets subsequently experienced a reopening rally from October 2022 to January 2023 that saw the MSCI China index surge 57% over a 65 day period.

Now, China's rally could be fueled further if Chinese firms post strong financial results in-line with lifted earnings forecasts. Goldman Sachs said it had lifted its earnings forecasts on expectations the stimulus package could drive a 40 basis point increase in China's GDP.

Inflows from mutual funds also could help drive the rally, with allocations from mutual funds currently at historic lows of around 5%. Chinese equities could see $45 billion worth of inflows if active funds raise their positioning to in Chinese stocks to market weight.

Goldman Sachs' analysts also upgraded China H shares - which include shares in mainland China companies that are listed on the Hong Kong stock exchange - to an overweight rating.

-Louis Goss

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10-07-24 0605ET

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