Xi’s Pledge Boosts Hopes Among Jaded China Stock Traders
(Bloomberg) -- Chinese stocks rebounded from a two-year low after President Xi Jinping made a bold commitment to boost infrastructure construction in a bid to revive the economy.
A late surge saw the CSI 300 Index end Wednesday’s session with a 2.9% gain, its biggest since March 16, as Xi said all-out efforts must be made to spur infrastructure spending. Signs that authorities are starting to bring the twin Covid-19 outbreaks in Shanghai and Beijing under control also stoked optimism.
Wednesday’s rally came even as traders have been increasingly indifferent to Beijing’s verbal promises, with recent policy pledges failing to rev up shares. Doubts remain over whether today’s rebound marks the beginning of a more sustainable advance in the CSI 300 -- one of the world’s worst-performing equity gauges this year with a 21% loss.
Policy pledges have failed enthuse traders who say the major concern for markets is China’s stringent Covid-zero restrictions. Strict lockdowns across the nation are damaging business confidence and disturbing supply chains, yet top officials have shown no indication of moving away from the stance.
What Bloomberg Economics says:
“President Xi Jinping’s pledge to increase infrastructure construction is the latest sign more stimulus is on the way. China has the firepower. Trouble is, lockdowns and other virus curbs on activity are hindering policy support and depressing sentiment. A significant confidence boost is required. A clear road map for exiting Covid Zero is what’s needed to turn the economy around.”
-- Chang Shu and David Qu
A boost to stocks on Tuesday from the People’s Bank of China’s plan to support small businesses didn’t last through the day, with the benchmark CSI 300 closing 0.8% lower. That added to the previous day’s 4.9% plunge, which was the biggest in more than two years.
Traders also shrugged off the securities watchdog’s call on April 21 to institutional investors such as the National Social Security fund to boost stock holdings. Stocks also fell on April 19, when the PBOC announced 23 support measures. All major Chinese equity gauges have now erased the knee-jerk rally spurred by a sweeping set of policy vows mid-March.
“The market is no longer responsive because there’s no easing up of the negative in view right now,” said Yang Ziyi, a fund manager at Shenzhen Sinowise Investment Co. “We just need to wait. We saw the same kind of numbness towards vocal support during the burst of the 2015 bubble and in 2018.”
Shares of Chinese infrastructure firms rallied on Wednesday following Xi’s pledge. The smaller, growth-heavy ChiNext Index soared 5.5%, the most since March 2016.
The barrage of verbal promises has drawn comparisons to the events in October 2018, when stocks were plummeting amid the U.S.-China trade war and domestic deleveraging worries.
Despite the initial boost, profit-taking soon kicked in and stocks tanked to fresh lows less than two months later. Historically cheap valuations pulled the market out of the doldrums in 2019.
“A revelation has hit traders that Chinese policy makers are facing an impossible trinity of goals here: they’re not going to hit the 5.5% growth target and limit the amount of leverage in their system and also have a zero-Covid tolerance policy,” Eli Lee, head of investment strategy at Bank of Singapore, told Bloomberg Television. “And this means, at the margin, the thesis for the Chinese renminbi and equities is weaker.”
©2022 Bloomberg L.P.
With assistance from Bloomberg