China Stocks: Investors Divided on Economic Revival After Stimulus

Beijing’s pivot toward economic stimulus has sparked fevered stock buying from hedge funds and individual investors. But big asset allocators and multinational companies are wary of rushing back into Asia’s largest economy.

From debates over cocktails at Singapore’s Formula One race to hushed conversations in the speaker’s room at the Milken Institute Asia Summit last month, one topic dominated discussions among global financiers schmoozing in the city-state: China’s demise as an investment hotspot.

Sentiment around the country was at rock bottom just days before the stimulus package was unveiled. “Everybody is so pessimistic – I’ve never seen so much pessimism in my whole investment career,” lamented 27-year industry veteran and Prudential Plc’s chief investment officer Don Guo during a Sept. 18 conference session. “But it’s still the largest growth engine for the world and is still growing.”

Fang Fenglei, dubbed the godfather of China private equity who built his fortune on the rapid ascension of the world’s second-largest economy, rattled off dire statistics from property to stock markets and foreign direct investment at another session. Jeffrey Li, founding partner of GL Capital Group, said there’s so little interest in China funds that some peers have rebranded themselves as “Asia funds.”

Then, in a flash, the stimulus package on Sept. 24 ignited an explosive rally in Chinese stocks and fueled optimism about an economic revival. The country’s benchmark CSI 300 stock index and the Hang Seng China Enterprises Index in Hong Kong soared around 20% in a matter of days, chalking up their best performance since 2008. Some analysts expect the rally to continue Tuesday, when markets in China reopen after a week-long holiday.

China’s Brokers Skip Holidays to Staff Up for ‘Hectic’ Reopening

Despite the stock market boom, Beijing’s rescue plan is deepening the divide among financiers and forcing them to decide if now is finally the time to get back into a market that has torched the careers and portfolios of countless China bulls over the past five years. Many global businesses are also at a crossroads in China, and corporate decision makers are weighing whether to scale back their operations or invest more in the country after several years of disappointing sales and profits. Next month’s US elections — and how the outcome will change Washington’s stance on China — is another major worry.

Billionaire David Tepper of Appaloosa Management LP declared he is buying “everything” related to China following the sweeping measures, and other hedge funds have piled into the country’s stocks at a record pace. Lombard Odier isn’t buying into the rebound after dumping all China stocks and bonds for its private clients, CIO Michael Strobaek recently told Bloomberg News.

Others say it’s too early to make a definitive call on whether Beijing’s actions will pull China out of an economic rut, and that structural issues and geopolitical headwinds still persist for Wall Street firms and businesses operating in the country. Previous China stock market rallies in the past few years ended up fizzling out after the country’s economic performance disappointed.

“It’s a very deep winter there right now. I think it’s going to be probably mid-2025 when things start to thaw,” said Ed Grefenstette, chief executive officer and CIO of The Dietrich Foundation, after the stimulus was announced. He added that many US asset allocators are likely to wait for executive orders and political decisions to play out before considering new investments in China. The Pittsburgh-based charity has about $1.5 billion in assets under management.

The drumbeat of global businesses rethinking their China strategy and pulling back from the country has been growing.

American, European and Japanese automakers are closing some of their plants on the mainland, Western technology companies and retailers have collectively laid off thousands of China employees, and manufacturers are shifting parts of their supply chains to other countries. Some of the Wall Street banks and global money managers that long dreamed of riches from China’s financial-sector opening have also cut back on staffing and wound down some onshore units.

“China has been the number one client topic over the past year, and companies have been grappling with reexamining and diversifying their exposure,” said Teddy Bunzel, who runs US investment bank Lazard Inc.’s geopolitical advisory arm.

Shrinking Chinese household wealth, fierce local competition, a deteriorating geopolitical climate, and the opaque yet increasingly tough regulatory environment are forcing corporate decision makers to go back to the drawing board. Tensions between the world’s largest economies have flared over China’s military aggression toward Taiwan, and Washington’s campaign to cut Beijing off from high-tech semiconductor chips.

Bunzel said he has been fielding queries from clients, and many are worried about what a Donald Trump victory in November would mean for them, especially if it leads to the institution of a 60% across-the-board China tariff. But the sheer size of China’s economy and its massive consumer market mean most companies are likely to take “a more deliberate and adaptive approach to their China strategy, rather than ignore the market altogether,” he added.

Corporate executives have also come to the realization that the years of double-digit growth rates are a thing of the past. Still, many Western companies are trying to find creative solutions in China instead of exiting it. Coffee chain Starbucks Corp. is seeking strategic partnerships in China after a sales slump. Luxury brands owner LVMH is rethinking its stores footprint and marketing approaches while waiting for a consumer spending rebound.

Strategy Risks, a New York-based consulting firm, said an analysis it conducted of around 30 large American companies found that they were acting similarly in the way they managed their economic and financial risks in China.

The analysis, prepared exclusively for Bloomberg News, showed that large US firms are mostly heeding pressure from Washington to reduce their China risk exposure. “Global geopolitical instability will almost certainly continue to grow,” said Isaac Stone Fish, founder and CEO of Strategy Risks. “China exposure is extremely unlikely to be the safe or predictable choice for multinationals in this increasingly chaotic world.”

Western companies should be reassessing their ties to China in light of the country’s support for the Russian economy, BlackRock Inc. CEO Larry Fink said last week. The world’s largest asset manager owns a mutual-fund business in China. Its strategists recently recommended turning slightly overweight Chinese stocks following the stimulus, but still see long-term, structural challenges for the economy.

Fears of retaliation from Beijing if they exit completely has also meant some firms are staying in China with minimal levels of staffing and no plans for further investments, said executives and consultants.

“Bottom line, the bloom is off the rose in China, and it will take much more than the recent stimulus measures to restore its allure,” said Jeremy Mark, a senior fellow at the Atlantic Council. The business environment in the country is becoming more complicated and profits are harder to come by, he added.

International companies are still investing in China, though much less than before. Foreign direct investment into the country hit a record of 1.23 trillion yuan ($175 billion) for 2022. In the first eight months of this year, it has totaled just 580 billion yuan.

A recent China business climate report by the American Chamber of Commerce in Shanghai said just 13% of its respondents ranked the country as their headquarters’ top investment destination — the lowest rate in the survey’s history. It said a record high 25% of its members cut investment in China last year, and the top reason was concerns over slowing growth.

“Where China’s largest challenge lies is explaining how its own drive for self-sufficiency, drive to dominate certain industries and a preference for local players in government procurement leaves opportunity for foreign firms to operate profitably in China,” said Michael Hart, president of AmCham China.

At SuperReturns Asia, another large conference in Singapore last month, international investors were sanguine about the money-making opportunities in China after the stimulus package was unveiled.

“Our belief is that China will look more and more like other developed economies, and their growth rate will naturally come down and that is actually OK,” said David Hunt, CEO of PGIM, the asset management arm of Prudential Financial Inc. He added that there will need to be a fundamental change in domestic consumption before there are big improvements.

“Up until 2020, I was a very strong China bull,” said Yup Kim, CIO of the Texas Municipal Retirement System, which manages about $41 billion in assets. “In the next 10-15 years there’s going to be a lot of equity value created across Chinese companies,” he predicted, adding that American investors are less likely to benefit from that, compared with investors in the region.

A top executive at another pension fund that had ploughed almost $1 billion into China’s market around the peak said valuations are still too high. While China is too big to ignore, they now prefer to invest passively in the country via indexes.

“From being the favorite topic, China has gone to being the least favorite topic — so I only have upside,” quipped TH Capital Managing Partner Rafael Ratzel during a bullish presentation. “If I’m wrong, you’ll say he’s just some German guy and of course he’s wrong about China. But if I’m right, well, we’ll all make money.”