Chinese stocks, which had fallen to their lowest level in five years, began a powerful rally since the government introduced a series of measures to boost the economy.
Things of state capitalism.
According to Louis-Vincent Gave, CEO of the consulting firm Gavekal, Beijing is encouraging the stock market rise to regain domestic confidence and deliver higher GDP growth – as opposed to the past, when it poured money into the economy and as a side effect, saw stock prices rise.
“The bull market would not be the result of policy – it is the policy,” wrote Gave in a note to clients published today.
According to him, this explains why some of the initial measures were new instruments to facilitate companies buying back shares.
“It seems that Chinese authorities have simply decided to encourage the stock market in what would be a bet to fix the finances of millennials and restore confidence,” said Gave.
If his analysis is correct – and Gave has closely followed China for more than a decade – Beijing will not stop creating new incentives until it achieves three results: rise in inflation (“no sign of that yet”); weakening of the local currency (“so far, the renminbi has remained stable”); and a bull market until stocks reach “absurd valuations and/or speculation becomes excessive.”
However, Gave believes that the new bull market cycle will be different from previous ones.
Previously, the Chinese government increased infrastructure spending and it was possible to capture value by buying companies like Vale, BHP, Rio Tinto, LVMH, or Hermès – without “getting your hands dirty in China.”
“Simply buy the mining companies from Australia and Brazil, the luxury brands from France and Italy, or the car manufacturers from Germany,” he commented.
But this time, the boom will not aim to create jobs, which in the past meant investing in concrete and steel. “It will have to be aimed at fixing the balances of people and companies. Inflating the price of ore or importing more Louis Vuitton bags does not contribute to this goal,” says the analyst.
According to Gave, those who want to ride the new cycle will have to invest in China – and therefore, it may be unfortunate that many analysts have spent the last years convincing clients that “China is not investable.”
In a webinar last week, Gave said the Chinese market has a “trifecta” in its favor: “things are cheap, the momentum is positive, and now there are government incentives.”
According to Gave, one reason for his optimism is that the Fed’s interest rate cut should lead to investors in Hong Kong liquidating dollar positions and buying Chinese stocks.
According to Bloomberg, Chinese stock ETFs had the highest positive flow in many years last week.
The Hang Seng index in Hong Kong has risen 35% in the last 30 days – reaching its highest value since 2022. The index is already outperforming the S&P 500 this year (38% for the Chinese one against 20% for the American).
In New York, Vale’s stock has risen 13.6% in the last 30 days. Suzano has risen 5%.
Source
Arwen Volkov, A graduate of the University of St. Gallen in Switzerland with a degree in International Finance, Arwen specializes in sustainable finance and green investments. She began her career at an investment bank in London, where she developed financing models for environmentally friendly projects. Known for her analytical and strategic thinking skills, Arwen is a sought-after financial consultant. In her spare time, she mentors fintech startups, contributing to their growth strategies. She is also a nature enthusiast and an amateur photographer.
