The Federal Reserve is widely expected to finally begin to loosen its interest rate brake this week, giving China’s central bank authorities room to take action. By extension, Washington, D.C.’s move could also spell good news for Chinese stocks. Analysts at HSBC said late last week that “monetary easing in the United States may be a catalyst for the Chinese market to re-evaluate growth industries, which have outperformed value industries” by an average of 44 percentage points. Chinese stocks may dominate. “We emphasize that profit growth is the key,” analysts led by Sun Yu, head of research at HSBC Qianhai Securities, wrote in a report. “We believe growth sectors such as semiconductors and consumer electronics, which posted strong earnings in the first half of 2024, are likely to outperform in the coming easing cycle.” High U.S. interest rates relative to China make global institutions quite straightforward Choose U.S. Treasuries over Chinese stocks. So has Nvidia’s stock price, which is up more than 600% since the AI craze began less than two years ago. This summer, a Chinese city reportedly became the largest investor in a Chinese fund tracking the Nasdaq 100 index. Need more than lower interest rates Chinese stocks need more than easy monetary policy to be truly attractive, other global investors say. Laura Wang, chief China strategist at Morgan Stanley, said in an earlier report that “when it comes to Chinese equities, the biggest drivers of global investor allocation decisions are (business) fundamentals” and macro Economic status. number of digits. is a catalyst, but the broader economy is flagging. In a sign of urgency, Yi Gang, former governor of the People’s Bank of China, said in rare public comments earlier this month that China needed to focus on fighting deflationary pressures. “It’s not just real estate,” Costello said. “In some ways, this is a fundamental crisis of confidence.” “The government can drive interest rates down, but if households don’t want to spend the extra income, it won’t enter the economy,” he said. Capital expenditure hesitancy Companies are also cautious about spending. James Wang, head of China strategy at UBS Investment Bank Research Department, said that although second-quarter profits improved from the first quarter, capital expenditures fell by 4% in the first half, the lowest level since 2017, with industrial and renewable energy sectors fall. Wang added that performance and profit forecasts for online, consumer and automotive companies were relatively good. UBS expects MSCI China earnings per share to grow 7% this year. Earlier this year, Pan Gongsheng, governor of the People’s Bank of China, admitted that the Fed’s easing policy would create room for further interest rate cuts in China. On the fiscal front, Beijing also issues ultra-long-term bonds, but remains relatively conservative. “We believe Chinese stocks should benefit from lower federal funds rates and reduced currency pressures, especially if the U.S. economy avoids falling into recession during the Fed’s rate-cutting cycle,” HSBC’s Sun said. “Specifically, our analysis shows that assuming Without a recession in the U.S. economy, the average returns of the Wind All-A Index and (Hang Seng China Enterprises Index) could reach 24.9% and 1.5% respectively within 12 months after the Federal Reserve cuts interest rates for the first time,” the HSBC report stated. In looking for stocks that might benefit from lower borrowing costs, HSBC’s screen found stocks with higher debt-to-asset ratios including Shenzhen-listed pig producer Muyuan Foods, Shanghai-listed China Southern Airlines and Hengli Petrochemicals. National oil company Aramco is in talks to acquire a 10% stake. HSBC’s screening only focuses on mainland China stocks, including factors such as expected revenue growth of more than 10% this year and an asset-liability ratio of more than 60%.
