Don’t fight the People’s Bank of China.
That’s the advice to investors from Adrian Mowat, the Hong Kong-based chief Asia and emerging-market strategist at JPMorgan Chase & Co. who raised his rating on Chinese stocks to neutral from underweight in a report dated yesterday. He said shares will rally through October after the Hang Seng China Enterprises Index entered a bull market on July 28.
China’s central bank presided over a bigger-than-estimated surge in new credit in June and has cut reserve requirements for some lenders, while local media reported the PBOC set up a 1 trillion yuan ($162 billion) lending facility with the China Development Bank to fund housing projects. The signs of monetary easing, along with accelerated government spending and gains in manufacturing industries, have spurred mutual fund managers to boost Chinese stock holdings to record highs, according to a July 28 report from HSBC Holdings Plc.
“The scale of monetary stimulus since June is a surprise,” Mowat wrote. “All these changes indicate a more aggressive approach to driving growth.”
Mowat is joining bulls, including Standard Chartered Plc’s Erwin Sanft and Templeton Emerging Markets Group’s Mark Mobius, who predict the rally will extend as low valuations lure investors and the government supports growth. Bears such as Bank of America Corp.’s David Cui say stimulus is delaying the economy’s shift toward a more sustainable model driven by consumption and services.
The Hang Seng China Enterprises index fell less than 0.1 percent to 11,119.32 at the close in Hong Kong, snapping a sixth straight day of gains. China’s Shanghai Composite Index of mainland shares slipped 0.1 percent, paring the biggest monthly advance since 2012.
Aggregate financing was 1.97 trillion yuan in June, the PBOC said on July 15, compared with the median estimate of analysts for 1.425 trillion yuan. New local-currency loans were 1.08 trillion yuan and M2 money supply grew 14.7 percent from a year earlier.
Premier Li Keqiang said in June that authorities will “ensure” a minimum annual economic growth rate of 7.5 percent. China’s manufacturing industries expanded at the fastest pace in 18 months in July, according to a preliminary purchasing managers’ index from HSBC Holdings Plc and Markit Economics. Industrial companies reported a 17.9 percent gain in earnings in June from a year earlier, the fastest pace since September.
Investors’ sentiment on Chinese stocks has improved over the past few days amid speculation the economy will stabilize in coming quarters, Jason Sun and Minggao Shen, analysts at Citigroup Inc., said in a report yesterday.
The ruling Communist Party’s investigation into former security czar Zhou Yongkang could also provide a boost to equities, Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, wrote in a report today.
“With some high-profile arrests under its belt, we believe the focus of the new government can start to shift from the anti-graft campaign to real institutional reforms, which are badly needed for China’s long-term economic health,” Lu said.
JPMorgan’s Mowat, who cut Chinese stocks to underweight in October, recommends buying “high beta” stocks including brokerages and property companies with low valuations, along with construction and railroad companies.
“Our China model portfolio is structured for a bull market, he wrote.