China’s V-shaped stockmarket bounce

China's economy contracted sharply in the first three months of 2020, but it has since staged a V-shaped comeback, with the CSI 300 index up more than 15% so far.

China was the first country into the Covid-19 crisis and is now the “first out”, writes Larry Elliott in The Guardian. The world’s second-biggest economy contracted by an annual 6.8% in the first three months of the year, but has since staged a V-shaped comeback. Official statistics show that GDP increased by 4.9% on the year in the third quarter. The International Monetary Fund (IMF) thinks China will grow by 1.9% in 2020, making it the only major economy set to expand. 

The debt question

Industry continues to lead the recovery, says Bloomberg. Consumption for the first three quarters is still 7% down on the same period last year and “tourism, education and travel” lag behind other sectors. Yet the latest data shows that shoppers are starting to close that gap, with retail sales growth accelerating in September. The recent Golden Week holiday encouraged many people “to open their wallets again”. 

Economists take China’s official growth statistics with a pinch of salt, says The Economist. One camp argues that while the numbers are “overly smooth” they paint a generally accurate picture of what is going on. Sceptics argue that they are more fundamentally misleading. Yet whomever you ask, everyone agrees that the current rebound is real: to see that you only need look at China’s “bustling shopping malls… and its mobbed tourist sites”. 

Household borrowing growth has been muted in most advanced economies this year, but not in China, says Mike Bird in The Wall Street Journal. IMF data shows that the country’s household debt to GDP ratio is 31.6% higher than it was a decade ago, by far the biggest jump among the world’s top ten economies. Much of that borrowing goes towards property purchases, sustaining a “nexus between banks, home buyers and real-estate developers” that helps keep activity ticking over. Yet “leaning on households again” will only deepen the economy’s “financial vulnerabilities”. 

A rally with legs

China’s CSI 300 index is up more than 15% so far this year, comfortably beating the 5% gain on the US S&P 500. With the virus under control and the economy bouncing sharply it is little surprise that Chinese shares are soaring, says Fidelity’s Tom Stevenson in The Daily Telegraph. The total value of listed Chinese equities recently surpassed $10trn for the first time. Risks include a frothy property sector and a probable resumption in trade spats whoever wins the US election. But a “well-balanced portfolio” can hardly ignore the country. 

As elsewhere, China’s rally has been led by a “narrow wedge of tech powerhouses” while value shares have lagged, says Craig Mellow in Barron’s. Bull runs in 2015 and 2017 “ended badly”, but the market is no longer the Wild West. There are stricter rules on leverage and flighty retail investors are increasingly being replaced by institutional investors, who account for “70% of traded equities”. This “rally could have legs”. (Listen to our podcast with Pictet’s Shaniel Ramjee at moneyweek.com/podcast for more on China).

Recommended

When investors get over-excited, it’s time to worry – but we’re not there yet
Sponsored

When investors get over-excited, it’s time to worry – but we’re not there yet

When investors are pouring money into markets, it can be a warning sign of impending disaster, writes Max King. So how are fund flows looking right no…
26 Oct 2021
An investment trust that gives exposure to frontier markets
Investment trusts

An investment trust that gives exposure to frontier markets

An investment trust investing in small, illiquid emerging markets has disappointed, but deserves another chance, says Max King
26 Oct 2021
What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
How rising interest rates could hurt big tech stocks
Tech stocks

How rising interest rates could hurt big tech stocks

Low interest rates have helped the biggest companies to entrench their positions. But what if rates rise?
25 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021