The US Federal Reserve is widely expected to finally lift its foot off the interest rate brake this week, which should give China’s central bank some room to act as well. So the move in Washington, DC, could also be good news for Chinese stocks. “US monetary easing could be a catalyst for a re-rating of growth sectors in Chinese markets, with growth outperforming value,” HSBC analysts said late last week, by 44 percentage points, referring to the higher price-to-earnings ratios they believe Chinese stocks are likely to command. “We emphasize that earnings growth is key,” the analysts, led by Stephen Sun, head of research at HSBC Qianhai Securities, wrote in the report. “We believe that growth sectors such as semiconductors and consumer electronics, which posted strong earnings in the first half of 2024, could outperform Chinese stocks during the next easing cycle.” Relatively high US interest rates compared to China’s have made it relatively easy for global institutions to pick US Treasuries over Chinese stocks. Nvidia shares have also soared, up more than 600% since the AI craze began less than two years ago. A Chinese city is said to have become the largest investor in a Chinese fund tracking the Nasdaq 100 this summer. More than a rate cut is needed Other global investors say Chinese stocks need more than monetary easing to become truly attractive. “The biggest drivers of global investor allocation decisions when it comes to the Chinese stock market are (trade) fundamentals and macroeconomic conditions,” Laura Wang, Morgan Stanley’s chief China strategist, said in a note in early September. Perhaps worryingly, she noted that Chinese equity valuations are not positively correlated with U.S. Treasury yields in 2024. The iShares MSCI China ETF (MCHI) has held steady this year, up less than 1%, but has posted double-digit declines in each of the past three years. “Chinese stocks are attractively priced from a valuation perspective,” Aaron Costello, head of Asia at Cambridge Associates, told CNBC earlier this month. They’re “simply missing a catalyst.” “The fundamental catalyst is earnings,” he said, but the broader economy is struggling. “The problem here is deflationary pressures,” which remain intense. The core consumer price index, which excludes food and energy prices, rose only slightly. Former People’s Bank of China Governor Yi Gang said earlier this month that China needs to focus on combating deflationary pressures. “It’s more than just real estate. It’s a fundamental confidence crisis in some ways,” Costello said. “The government can push interest rates down, but if households don’t want to spend the extra income, it’s not going to go into the economy,” he added. Hesitant capital spending Companies have also been cautious about spending. While second-quarter earnings improved from the first quarter, capital expenditures fell 4% in the first half of the year, the slowest since 2017, with industrials and renewable energy leading the declines, James Wang, head of China strategy at UBS Investment Bank Research, said in a research report on Thursday. Internet, consumer and auto companies reported relatively better results and earnings forecasts, Wang added. UBS expects MSCI China’s earnings per share to grow 7% this year. Earlier this year, People’s Bank of China Governor Pan Gongsheng acknowledged that the U.S. Federal Reserve’s easing of monetary policy could open the way for China to cut interest rates further. On the fiscal front, Beijing has also been issuing long-term bonds, but has remained relatively conservative. “We believe Chinese equity markets could benefit from lower Fed rates and reduced currency pressures, especially if the U.S. economy avoids slipping into recession during the Fed’s rate-cutting cycle,” said HSBC’s Sun. “Specifically, our analysis suggests that the Wind All-A and Hang Seng China Enterprises Indexes could return an average of 24.9% and 1.5%, respectively, in the 12 months following the Fed’s first rate cut, assuming no recession in the US,” the HSBC report added. In a search for stocks that could benefit from lower borrowing costs, HSBC’s examination found that those with high debt-to-asset ratios included Shenzhen-listed pork producer Muyuan Foods, Shanghai-listed China Southern Airlines and Hengli Petrochemical, a refiner in talks to see Saudi Aramco take a 10% stake. HSBC’s examination looked only at onshore Chinese stocks with expected revenue growth of more than 10% this year and a debt-to-asset ratio above 60%, among other factors.
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A Fed rate cut may or may not help support Chinese stocks.
