China's epic rally: how sustainable will it be? - Week in Review #30
Top 5 areas of concern while we enjoy the ride
Below is a reprint of the essay that I published at Baiguan this Monday. After a few more trading days in Hong Kong, I think my assessment still holds. Since the original article was for the paying members of Baiguan, I will also paywall this one here.
If you are a paying member of Baiguan, you also have free access to this newsletter. Please approach me for access or ask me for a refund if you have double-spent.
Some of the core messages of my writing can also be seen in the recent Episode 5 of GotChina, a talk program made by Xinhua Institute. In this episode, I was joined by
of and of to talk about the state of the economy in China. (The chair that I sat on was previously occupied by the indomitable of , a high bar for me to live up to.)When I first prepared for this talk around 2 weeks ago, I got a little nervous. As always, I tried to sound a more optimistic note for the audience, even though most people were feeling quite down. But it’s not an easy task. Our economic problems are real. How can I be honest, informative, helpful, and not too pessimistic at the same time? How can I let the audience see the bigger picture and the silver lining, without sounding too detached from reality?
But we got lucky, the policy pivot and the huge market rally of last week made the final shooting an easy sail. (We are still not free from concerns, for sure, and you will see it both in the video as well as in the essay below.)
But before going into my essay, please follow GotChina’s YouTube channel, because you would not imagine how many obstacles those few entrepreneurial souls in a state-run institution would face in order to try something like this. Any support, feedback, and criticism of this project will be a huge encouragement for the people involved and ultimately will help us, state-run or not, to make meaningful progress.
China's epic rally: how sustainable will it be?
Something huge happened in China last week.
A raft of positive policies and policy messaging have finally signaled a real pivot in China’s economic policy. In response, the market sentiment that has been held back for so long has erupted like a volcano. In Shanghai, the stock index returned ~13% in a week, which is the best trading week in 16 years. Hong Kong's market was even more extreme and just notched its best weekly gain of this century. The strong sentiment has continued at the time of writing this newsletter.
Retail investors, many of whom were hurt so much to have left the market, are rushing back in. The stampede was so huge that even Shanghai’s stock exchange’s trading system had a glitch. According to BigOne Lab’s retail investor sentiment data, discussions related to the “bull market” have reached a multi-year height as early as on Sep 27, while discussion related to “profit-taking” has remained subdued, showing positive retail sentiment is still at an early stage.
China’s stock markets have seen many false starts in the last few years. The natural question, after days of euphoria, is whether the current rally will be sustainable.
In this article, we will examine the top 5 factors that have contributed to last week’s historic rally, and we will also list out the top 5 areas of concern that will determine whether this rally will stay alive.
The top 5 factors include:
Unorthodox approach to the stock market
Blunt recognition of key economic pain points in real estate and unemployment
Strong willingness to resort to fiscal measures
A real sense of urgency from top leadership
A new mode of external communication that leaves open space for imagination and interpretation
The top 5 concerns that will determine whether the rally will be sustainable are:
The exact details of the fiscal stimulus package
Looming shareholder selldown
The potentially negative effect of the new M&A policy on the stock market
Re-adjustment of central-local relationships and fiscal reform
The “pendulum effect” swinging to the other extreme