EBC Research Institute Hotspot Analysis | China Unleashes Major Moves, Stock Market Brews a Violent Reversal.

China took its first step this year to boost the sluggish stock market by announcing a 50-basis-point cut in the reserve requirement ratio for banks starting from February 5th. The central bank stated that this would release 1 trillion RMB in liquidity.

The central bank also mentioned that starting January 25th, the interest rates for agricultural re-lending, small business re-lending, and rediscounting would be reduced by 25 basis points respectively. Following the announcement, both A-shares and H-shares surged dramatically.

On Wednesday, the Hang Seng Index saw a 3.6% increase, marking its best single-day performance in two months. Before the policy announcement, the mainland stock market also experienced a strong rebound.

Previously, Bloomberg reported that the world's second-largest economy is considering deploying 2 trillion RMB to establish a stabilization fund to steady the market.

The latest actions of Jack Ma, one of China's most famous entrepreneurs, have also injected confidence into the market. He and his partner, Joe Tsai, bought approximately $200 million worth of Alibaba shares.

This means that their total holdings have surpassed those of SoftBank Group, making them the largest shareholders of Alibaba. Alibaba's stock recorded its biggest half-year gain yesterday, serving as the largest driving force behind the rally in the Hong Kong stock market.

Industry Ordeal

In a bear market, Chinese fund management companies are grappling with the hassle of massive redemptions. Last year, 148 stock and mixed funds were liquidated due to their small size, marking a five-year high.

Due to subdued subscriptions, these companies were forced to issue more funds based on their own capital. Zeben Consulting indicates that the number of such stock and mixed funds surged by nearly 40% last year to 122.

Furthermore, China has implemented policies to restrict the access of QDII (Qualified Domestic Institutional Investor) type funds, with one-third announcing a suspension or restriction on retail investors' subscriptions.

The ChinaAMC Nomura Nikkei 225 ETF saw its off-exchange premium surge to 20% this week, with other popular funds including those investing in the Indian and US markets.

American professionals also struggle amidst the turmoil in the A-shares market. The well-known index fund management company Vanguard Group's collaboration with Ant Group ended without fruition, opting to exit China in November last year.

BlackRock's China division reported losses for all eight of its stock funds last year. Despite this, not all asset management institutions that heavily bet on China have faced a Waterloo.

Bridgewater China Investment Management's assets under management quadrupled last year compared to two years ago, while Tengsheng China's assets under management doubled in the same period.

Turning Point

Some analysts believe the deep decline in the valuation of Chinese stock markets presents an opportunity for a future rebound, with the forward price-to-earnings ratio of Hong Kong stocks at around 8 and A-shares at 10, half that of U.S. stocks.

Data from S3 Partners shows that in the 30 days leading up to January 22nd, there was a significant decline in short interest against Chinese companies listed in the US.

According to estimates from BNP Paribas, the price of put options for the Hang Seng China Enterprises Index has dropped to its lowest level in many years over the past few months. Morgan Stanley's tracked emerging market funds are 70%-80% equal-weighted or underweighted in Chinese stocks.

Herald van der Linde, HSBC's Head of Equity Strategy for Asia-Pacific, suggests that once the bearish sentiment improves, the Chinese stock market has a 30%-40% potential upside.

M&G Investments, a UK-based institution, turned bullish on China at the end of last year and now considers the market a primary focus in Asia for this year.

Bridgewater takes a slightly bullish stance on Chinese stocks and bonds, citing continued policy easing to boost the economy and attractive valuations as reasons.

Ben Powell, BlackRock's Chief Investment Strategist for Asia-Pacific, has a neutral stance on Chinese stocks. He sees selective buying opportunities in companies with healthy balance sheets (capable of self-help measures like buybacks without relying on stabilization funds).

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