The China Briefing

Is the rally for real?

The last month has been a period of consolidation for China equities. Nonetheless markets have held on to significant gains from their low point.

Please find below our latest thoughts on China:

  • The last month or so has been a period of consolidation for China equities from their year-to-date peak in midMay.
  • Although returns overall so far in 2024 are quite muted, nonetheless markets have held on to significant gains from their low point. Since Chinese New Year, China A-shares are up around 13% and H-shares more than 20% (USD).1
  • The question now, of course, is whether this rally is for real or just another “head fake” similar to what occurred last year.

Chart 1: China A shares - IPO and secondary issuance vs share buybacks (in RMB billion)

 
Chart 1

 

Source: Wind as at 31 May 2024

  • In our view, we see considerable differences this time around. Most notably, there has been an important shift in policy direction, in particular with a focus on containing downside risks in both the property market and also domestic equities.
  • While the support for equities was most apparent and direct in January, when the “national team” stepped in to buy onshore ETFs in size, since then there has been seemingly quite limited state-sponsored buying of the China A market.
  • Instead, the main focus has been the securities regulator (CSRC) taking action to restore confidence in markets, especially through protection of investor interests.
  • There has been a swathe of announcements in areas such as volume of new listings, challenging the use of funds raised from equity issuance, forced delistings for companies not meeting certain criteria, and increasing dividend payouts.
  • Lifting the bar to raise equity, in our view, helps tackle one of the major structural issues that has weighed on China A markets for many years.
  • While other markets such as the US and Japan have seen sustained equity shrinkage, with share buybacks consistently ahead of new issuance, China A-shares have had the opposite issue.
  • New equity supply, in the form of secondary issuance and IPOs, has typically averaged around 1-2% of total market capitalisation. This far outweighs the level of share buybacks (0.2% in 2023, for
    example).2

Chart 2: iBoxx USD Asia ex Japan China Real Estate High Yield Index (1 year)

Chart 2

Source: Bloomberg as at 31 May 2024

  • In years when there has been strong investor appetite for equities, this excess supply can be absorbed. But when confidence is low – as in recent years – then the supply weighs heavily on the market.
  • As a result of the policy changes, so far in 2024 the level of share buybacks is similar to the level of equity supply.3 If this pattern continues, then the impact of one of the equity market’s major headwinds will be significantly reduced.
  • Real estate stocks were some of the biggest winners of the market rally post Chinese New Year. And they have also pulled back in recent weeks.4
  • This reflects, in our view, the initial market hope that the property market is finally getting close to a turning point. And subsequent concerns about how policy rhetoric will translate into reality.
  • Our perspective is the recent policy measures, especially government support for buying up housing inventories, is an important turning point that sends a strong message about intentions to put a floor under the housing market.
  • While further measures are needed – the oversupply of property remains high in many areas – nonetheless, financial markets certainly appear to indicate that tail risks for developers have eased.
  • The iBoxx USD Asia ex Japan China Real Estate High Yield Index bottomed in November 2023 and has moved steadily higher since then.5
  • One of the most important reasons to stabilise the real estate sector is because of the broader impact it has on consumer sentiment – property accounts for close to 60% of household total assets in China.6
  • Having said that, there have been several recent indicators that consumers’ willingness to spend is starting to stabilise. The largest food service delivery company in China has recently raised its earnings guidance and is seeing an increase in order volumes.7
  • China’s second-largest ecommerce festival – so-called “618” – has been in full swing. Originally created by JD.com to coincide with its founding anniversary on 18 June (1998), it didn’t take long for other platforms to also adopt the festival.
  • The final “618” results are not yet in, but indications are that competition remains intense as domestic ecommerce operators continue to strive to offer “value for money” products.The final “618” results are not yet in, but indications are that competition remains intense as domestic ecommerce operators continue to strive to offer “value for money” products.
  • And to give some perspective on the scale of China’s consumption power, even 2023’s somewhat depressed “618” sales hit USD 111 billion, which is three times what US shoppers spent online in the equivalent Black Friday to Cyber Monday period.8
  • And in another sign of the times, China has overtaken the US as the world’s largest freshly-made coffee market. The country now has around 50,000 coffee shops. Shanghai leads the coffee frenzy with almost 10,000 stores.9

1 Source: Bloomberg as at 12 June 2024
2 Source: Wind as at 31 May 2024
3 Source: Wind as at 31 May 2024
4 Source: Bloomberg as at 12 June 2024
5 Source: Bloomberg as at 12 June 2024
6 Source: Goldman Sachs as at 31 December 2022
7 Source: Goldman Sachs as at 11 June 2024
8 Source: statista.com as at November 2023
9 Source: Bank of America Securities as at 5 June 2024

 

  • Disclaimer
    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

    This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of this document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional /professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

    This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).

    AdMaster: 3420012

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.