HSBC, CICC among major financial firms calling bottom on China stocks after Beijing moves to soothe investors

• ‘Given the policy bottom is in place, the market bottom is in sight’
• Exodus of overseas funds might be over after foreign investors sold US$8 billion of Chinese yuan-traded stocks this month, CICC says

Some of China’s top investment banks and money managers have started to call a bottom on the world’s second-largest stock market, after Beijing reassured investors by pledging more measures to bolster the economy and stocks, and the US Federal Reserve started to raise borrowing costs as anticipated.

China International Capital Corporation (CICC) said that a huge sell-off was already over and that the market had moved to the stage of building up from the bottom, while Huaxi Securities said that stocks would start to rebound from where they were currently. HSBC’s local fund management venture had also become optimistic about stocks, citing policy support and easing of headwinds that have weighed on sentiment, and HFT Investment Management said that the 25 basis-point increase in US interest rates had removed a major market hangover.

China’s stocks have been on a wild ride over the past week, with panic selling and regulatory talks jolting the market. The benchmark Shanghai Composite Index fell to a two-year low before Vice-Premier Liu He said in a financial stability meeting on Wednesday that the government would roll out more measures to bolster growth, defuse the risk in the property market and stabilise stocks. Just hours later, the China Securities Regulatory Commission (CSRC), the stock market watchdog, responded to Liu by encouraging listed companies to buy back shares and asset management firms to subscribe to their own fund units. The CSRC also said that it had moved to resolve the delisting risk of Chinese companies trading in the US, a key concern that had spurred recent selling by foreign investors.

“That’s a set of policies that is helpful to repair the over-pessimistic sentiment among investors,” said Li Lifeng, a strategist at Huaxi Securities in Shanghai. “Given the policy bottom is in place, the market bottom is in sight.”

The Shanghai Composite will bottom out at a range of 3,000 to 3,100 and start a rebound, and its sustainability will rest on the magnitude of Beijing’s stabilising measures, the pace of the Fed’s tightening and geopolitical developments, Li said.

The index rose 1.2 per cent to 3,251.07 at the close on Friday, rebounding 6 per cent after hitting a two-year low of 3,063.97 on Tuesday. It remains 11 per cent down this year and is among the worst performing major markets in Asia, as investors are wary of a slowdown in growth, a flare-up in the pandemic that has rattled the country’s biggest cities, and potential runaway inflation amid Russia’s invasion of Ukraine.

An exodus of overseas funds might have already come to a halt after foreign investors sold a combined 50.8 billion yuan (US$8 billion) of Chinese yuan-traded stocks this month, CICC said. Vice-Premier Liu’s veiled reference to a softened stance when it came to Beijing’s regulatory crackdown and a pledge to stabilise Hong Kong’s stock market have largely allayed concerns among global fund managers, the investment bank said.

“The phase of rapid declines may already be over and the market may move into a pattern of consolidation, with shrinking turnovers,” CICC said in a report dated March 16. “While the market will still face twists and turns amid uncertainty such as geopolitics, stagflation, the pandemic and China-US relations, opportunities override risks in the long-term point of view.”

China will stick to policy loosening to shore up growth, as the Fed’s measured interest-rate increase last week reduces the risk from a divergence in monetary policy between the world’s two biggest economies, said HFT Investment, a Shanghai-based asset management firm that oversees US$21.7 billion in assets. An increase in US interest rates typically triggers outflows of capital seeking higher returns from emerging markets like China, leaving less room for their monetary policies.

Investors should, however, remain vigilant about the risk of a faster pace of tightening by the Fed, whose dot plots suggest seven rate hikes this year and another four in 2023 in a more aggressive move to curb inflation that is at a four-decade high, said Shen Chao, a strategist at HSBC Jintrust Fund Management.

By valuation standards, Chinese stocks, whether onshore or offshore, are a “buy”, according to Montreal-based research firm Alpine Macro. The CSI 30 Index of the biggest stocks on the mainland’s exchanges trades 15.6 times earnings, its cheapest level in almost two years, while the Hang Seng Tech Index of the likes of Alibaba Group Holding and Tencent Holdings is valued at 10.8 times, near a record low, according to Bloomberg data.

“With these stocks trading at such depressed levels, we believe it is too late to sell. There are greater odds of prices moving higher than lower beyond near-term volatility,” said Yan Wang, a China strategist at Alpine Macro. “However, some catalysts may be needed to restore market confidence, such as increasing share buybacks, major investment by China’s state investors or signs of US-China rapprochement on both the economic and geopolitical fronts.”

Author: Zhang Shidong, SCMP