China Traders Await Policy Meeting to Decide on Market Fate

(Bloomberg) --

One week investors in China seem content with existing government measures to support the country’s slumping economy. The next, they’re calling for more stimulus.

Judging by the lack of conviction in Chinese financial markets, the outcome of this month’s key policy meetings may be the deciding factor for investors. While volatility in stocks and the yuan has eased on expectations Beijing will ensure stability ahead of the May 22 start date, the CSI 300 Index is still down 3.1% for the year and the currency has lost about 1.8%. The equity gauge added just 0.2% on Wednesday.

Stock valuations are being capped by slumping corporate profits, which are unlikely to recover any time soon from their worst first quarter since at least 2003 as the virus pandemic hammered investor sentiment. Signs of fading momentum can be seen in languishing stock turnover.

Beijing has already hinted at more support, with the central bank on Sunday vowing to deploy stronger policies. But the lack of specifics -- and the muted reaction in markets this week -- suggests concrete stimulus measures may be the only catalyst that investors can count on to break the grind.

“Any stimulus out of the meetings will strengthen investor confidence on future economic development,” said Pan Jiang, chief executive officer of Shanghai V-Invest Co. He’s maintained his stock allocation at more than 80% but said he has no plan to buy more for now.

Some retail traders are positioning for a rebound; last week they boosted stock leverage by 19 billion yuan ($2.7 billion), the most in two months. Still, the total figure stood at 1.05 trillion yuan as of Tuesday, 65 billion yuan below this year’s peak in March. Equity turnover on Wednesday was 562 billion yuan, less than half the high of 1.4 trillion yuan in late February.

The CSI 300 Index is trading at almost 12 times projected earnings, recovering from its late-March multiple of about 10 times. The gauge was battered in the first quarter, sliding 10% for its worst performance in more than a year. Investors may have little to fall back on after the combined income of Chinese non-financial firms fell by more than 50% in the first quarter. Analysts have warned of more pain ahead for corporate earnings amid a slump in global demand.

“Companies that rely on external orders may only really feel the sting in the second and third quarters,” said Raymond Chen, a portfolio manager with Keywise Capital Management (HK) Ltd. “My focus is on identifying which sectors will emerge out of the crisis and recover quickly.”

Foreign investors, who in April resumed their purchases of yuan-denominated shares, are also less sanguine about the market. While they’ve continued to buy in May, the pace of net purchases has slowed to about one third of the daily average in April, according to data compiled by Bloomberg.

Those looking for shelter might not get it from China’s government bond market, which is under pressure from this month’s surge in issuance from local authorities. A sell-off in China’s sovereign notes accelerated this week, with benchmark 10-year yields surging to a seven-week high. Holders of the notes are likely switching to the newly issued local-government bonds for better returns.

For stock traders, concern remains that China’s relatively prudent approach to stimulus won’t be enough to support smaller companies or stir consumer demand. Predicting the fallout from that on corporate earnings is anyone’s best guess.

“The more China waits to deploy broader stimulus measures, the bigger cost it will pay,” said He Qi, a fund manager with Huatai-PineBridge Fund Management Co. “I don’t think the second quarter is going to get any better and I doubt consumption will pick up any time soon.”

©2020 Bloomberg L.P.