Can China's stockmarkets keep surging?

Beijing wants to build up China’s savings as a demographic crisis looms

(Image credit: © Alamy)

Have Chinese shares turned a corner? The benchmark CSI 300 has tumbled by 8% since mid-February, but the index enjoyed its biggest weekly gain in three months last week, including a 3.2% leap on 25 May. That was its best one-day performance in almost a year.

The surge was partly driven by foreign cash, notes Jacky Wong in The Wall Street Journal. The Stock Connect platform, which allows foreign traders to buy and sell mainland shares, saw $7.1bn in net inflows over three days last week. That was the biggest three-day tally since the platform was launched in 2014.

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Bargains in big tech?

China’s post-pandemic recovery has been rapid, enabling policymakers to remove fiscal and monetary support sooner than in many other economies, says Andrew Batson of Gavekal Research. That has been accompanied by a broader regulatory clampdown, including renewed efforts to temper a frothy housing market and fewer bailouts for state-owned enterprises.

There has also been a concerted push to curb the power of big tech platforms; last November regulators blocked the flotation of Alibaba-backed Ant Group.

Shares in big tech giants such as Alibaba and JD.com have slumped this year, says Yen Nee Lee for CNBC. The latter’s shares are down by more than 12%. Some think the sell-off has gone too far. While the regulatory clampdown brings near-term uncertainty, some of the big Chinese tech firms offer “decent value” after recent falls, says Howard Wang of JPMorgan Asset Management.

Wall Street banks are diving in, says the Financial Times. Goldman Sachs, JPMorgan and BlackRock have announced partnerships with local banks and other ventures as they seek to tap China’s vast savings market. Chinese households are conservative investors: about 60% of household wealth is thought to find its way into the housing market, with one-quarter held in cash. Beijing is keen to build a more sophisticated savings infrastructure as it prepares for “an impending demographic crisis”. Despite rising geopolitical tensions, “American finance has never been closer to Chinese wealth”.

Momentum could keep the stock rally running, says Wong. New curbs on cryptocurrencies and commodity speculation might drive more funds into stocks. But credit growth is slowing and the fastest phase of the economic recovery is now over. “Chinese stocks are due for a catch-up with other markets, but the wind may quickly turn chilly again.”

China crimps the commodities cycle

China may have “slammed the brakes” on the commodities supercycle, says Craig Mellow in Barron’s. On 23 May regulators vowed “zero tolerance” towards “excessive speculation” in the market. They are unhappy about reports of hoarding by commodities firms. That sent local metals prices plunging, with iron-ore contracts on the Dalian Commodity Exchange falling by 9.5%. Nevertheless, global copper prices are still up by 28% in 2021, while iron ore has gained more than 30%.

China has enormous leverage in the industrial metals market, says Mellow. The economy consumes 70% of worldwide iron ore and 58% of its copper; 60% of the domestic steel industry is also state-owned. Many investors think we are at the dawn of a new commodities supercycle, but “a few words from the Chinese government” are giving the bulls cause to doubt.

Chinese demand has been a crucial factor in previous raw-materials booms and in this one. Yet Goldman Sachs says the next leg of the rally will be driven by Western consumers. Economic reopening, stimulus and green investment are creating a demand spike for industrial metals in developed markets. Indeed, global copper prices increasingly respond to the latest Western manufacturing data, not that from China. The bank thinks that “key commodities such as oil, copper and soybeans” will remain in short supply in the second half of this year.

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.