(Bloomberg) — An index of Hong Kong-listed Chinese stocks edged higher in choppy trading as investors debated whether weak macroeconomic data would prompt the government to step up stimulus efforts.
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The Hang Seng China Enterprises Index closed up 0.3% after dropping as much as 1.3% earlier. Property stocks were the biggest losers, with the sector index down 1.8%, while utilities rose. Mainland Chinese markets are closed until Wednesday for a public holiday.
Disappointing economic data over the weekend has put pressure on authorities to step up fiscal and monetary stimulus if the economy is to meet its growth targets this year. With deflation taking hold, investors are hoping the government will step up fiscal spending and even try to help consumers directly.
“We are likely to see more delayed fiscal policy support through 2024,” Wei He, an economist at Gavekal Research, wrote in a client note. “The government will probably introduce additional stimulus measures in the coming months.”
“Still, these measures are unlikely to convince market participants that the nominal growth outlook is improving,” he said.
Missing annual growth targets could further erode investor confidence, with overseas funds already pulling record amounts out of the country in the second quarter. A rally in domestic stocks earlier this year has lost steam, with the CSI 300 Index closing last week at its lowest since 2019. Without strong stimulus measures, the decline could deepen.
The People's Bank of China said over the weekend it plans to step up efforts to combat deflation and prepare additional policies to revive the economy after credit data showed private confidence remained weak despite previous interest-rate cuts. China plans to cut interest rates on more than $5 trillion in outstanding mortgage payments as soon as this month in a bid to stimulate consumption, Bloomberg News reported last week, citing people familiar with the matter.
“Recent Chinese economic data paint a grim picture, with key indicators below expectations, signaling increased uncertainty for Chinese equities,” said Manish Bhargava, CEO of Straits Investment Management.
He said aggressive stimulus measures could boost stock prices in the short term, but the authorities' incremental actions so far “raise questions about the potential scale and effectiveness of future interventions.”
China's macroeconomic situation is now so weak that its ultra-cheap valuations have called into question the argument for owning Chinese stocks. HSCEI is currently trading at 7.1 times forward 12-month earnings, compared with an average of 8.4 over the past five years, according to data compiled by Bloomberg.
While valuations look attractive, “from a macro perspective, it's not there,” Ekaterina Bigos, chief investment officer for Asia ex-Japan at AXA Investment Managers Plc, said in an interview on Bloomberg TV. “The macro factors across the board are very weak.”
Concerns about slowing economic growth have sent investors flocking to the country's government bonds, sending the 10-year yield to its lowest since Bloomberg began tracking the data more than two decades ago, prompting analysts to urge strong stimulus to break the cycle.
Policymakers have an opportunity to ease monetary policy this month as medium-term lending rates and liquidity decisions both expire. All but two of the analysts surveyed by Bloomberg expect the central bank to keep its one-year policy rate unchanged at 2.3%, but some expect a possible cut in the reserve requirement ratio.
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