On Tuesday, China's stock market opened with a significant surge — after a week-long hiatus, the domestic benchmark index soared by 11% immediately upon resuming trading. The trading volume on the Shanghai and Shenzhen stock markets skyrocketed to an unprecedented 3.43 trillion yuan ($486 billion), surpassing the record set on September 30th. At that time, the CSI 300 index rose by 8.5%, marking the largest single-day gain since 2008. Amid the surge in trading volume, several brokerage firms' trading apps experienced temporary freezes.

However, as the trading day progressed, enthusiasm waned, and the absence of additional significant stimulus measures at a key policy meeting left investors disappointed.

On Wednesday, the three major stock indices underwent a collective adjustment today, with the Shanghai Composite Index closing down by 6.62%, the Shenzhen Component Index down by 8.15%, and the ChiNext Index down by 10.59%. Individual stocks showed a general decline, with over 5,100 stocks falling across the Shanghai, Shenzhen, and Beijing markets, and today's trading volume reaching 2.9673 trillion yuan.

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Policy

On Tuesday, officials from the National Development and Reform Commission stated that they would accelerate spending while reiterating plans to increase investment and direct support for low-income groups and recent graduates. They added that China will continue to issue ultra-long-term sovereign bonds next year to support major projects and will advance the 100 billion yuan investment in key strategic areas originally budgeted for 2025 to this year.

The stimulus measures include interest rate cuts, reductions in bank reserve requirement ratios, increased liquidity in the stock market, and mortgage relief. China's second-largest economy is attempting to emerge from a prolonged slump, with deflationary pressures from a sluggish real estate market and weak domestic demand driving this downturn.

The stimulus plan is an effort by China to reverse the economic predicament, first announced on September 24th. Since then, a substantial inflow of funds has significantly boosted China's stock market, particularly in real estate and consumer staples, as investors bet on Beijing's recovery.

Additionally, the main policy content announced before the holiday is as follows:

Monetary Policy: Reductions in the statutory reserve requirement ratio, loan interest rates, and mortgage interest rates to increase liquidity and lower financing costs. Six major banks have also received additional capital injections.

Real Estate Market: The down payment ratio for the second home has been reduced from 25% to 15%. The People's Bank of China has established a 300 billion yuan re-lending mechanism to support local state-owned enterprises in purchasing unsold housing. Initially, this loan provided 60% of the bank loan principal, and this credit support ratio has been increased to 100%.Stock Market: The central bank is establishing a 500 billion yuan swap mechanism with securities brokers and insurance companies to finance stock purchases. It also intends to set up a dedicated refinancing mechanism for listed companies to repurchase shares.

Fiscal Policy: In light of the slowdown in land sales leading to decreased revenues for local governments, the government may be considering allowing higher fiscal deficit levels to reduce taxes, increase spending, and permit the central government to make more fiscal transfers to local governments. Another method to increase government spending is to raise the debt issuance quota, as local government bond issuance has already reached over 90% of the 2024 quota as of the end of September.

As the world's second-largest stock market, China has experienced multiple cycles of boom and bust. Faced with economic slowdown and deflation, China initiated a stimulus mode at the end of 2014, triggering a stunning stock market rebound, only to fall back to the original level by mid-2015. The Shanghai Composite Index more than doubled from October 2014 to June 2015, but then plummeted by over 40% within two months.

UBS

In today's investment advice, UBS stated that it expects greater short-term volatility before more specific plans are released. Tuesday's market reaction speaks for itself, with investors clearly disappointed by the lack of concrete details or commitments for strong fiscal action. China's stock market trading volume hit a historical high, surging to over 3 trillion yuan on Tuesday, indicating that investors are not sitting on the sidelines. We expect more two-way fluctuations in the short term before more concrete support measures are introduced. The actual details of China's spending plan may not be announced until late October or later, when a high-level meeting will be held and approved by the Standing Committee of the National People's Congress.

The current lack of fiscal details does not mean that significant support measures will not be introduced. Although some may interpret the lack of specific details from the National Development and Reform Commission on Tuesday as a way to cool down the recent rebound or reduce high market expectations, we believe this interpretation is unlikely. It is worth noting that the chairman's speech at the National Development and Reform Commission reaffirmed China's rather aggressive annual GDP growth targets and new social support commitments, both of which imply that significant fiscal stimulus support measures are still in the pipeline.

Instead of chasing index gains, consider adopting a more selective approach. Despite two-way fluctuations, the Chinese stock market is still far higher than it was a month ago. However, factors outside of China that could affect the market still exist, the most obvious being the results of the U.S. election, global trade tariffs, and potential U.S.-led technology controls. We advise investors not to actively chase market rebounds but to increase beta exposure, especially to high-quality companies within the internet and consumer sectors.

Therefore, we maintain a neutral stance on Chinese stocks in our Asian investment portfolio and advise investors to maintain a barbell strategy in Chinese stocks, which means increasing exposure to growth stocks while maintaining a certain defensive exposure. Investors who are underweight in Chinese stocks can consider using any downturns to increase exposure to preferred internet and consumer stocks. For defensive exposure, we prefer high-yield stocks in the financial, utility, energy, and telecommunications sectors. We particularly like state-owned enterprises due to their capital management reforms. Investors who have a higher-than-benchmark allocation to Chinese stocks can consider using any broad rebound to reduce overall exposure or rotate to our preferred Chinese industries. For clients who prefer to express a positive view on China outside of Chinese stocks, we are bullish on North Asian technology, Australian mining, and consumer stocks, as well as Singaporean real estate investment trusts (REITs).

JPMorgan Chase

In the past two years, due to cautious sentiment in the household and corporate sectors, interest rate cuts and liquidity injections have not yet promoted credit growth or economic activity. Can the surge in stock prices and a positive wealth effect release household savings, thereby translating into more consumption, and even a more positive sentiment towards the real estate market?National Day tourism and consumption data can give us an initial understanding of this emotional change, which may indicate an improvement in discretionary spending in the short term. For the real estate market, high inventory levels and developers' financial constraints mean that the industry still needs several quarters to stabilize.

Overall, additional policy measures are needed to stimulate economic activity and confidence. The policies announced so far have helped to smooth the deleveraging process, but balance sheets still need to be repaired. There is also a structural shift in the economy that requires a different set of industrial policies to address. This, in turn, will create jobs to adapt to the new labor market structure.

China's coordinated economic support policies are a positive step for China's economy and its markets. While waiting for better economic data, it is important to remember that some external factors such as geopolitical uncertainty still exist.

With only one month left until the U.S. election, many investors would consider that the U.S. views China as an economic and geopolitical competitor as a consensus between the two parties. However, in terms of policy implementation, details matter. From former President Trump's promise to impose a 60% tariff on all Chinese export products to Vice President Harris' potential for more targeted policies, the impact on China and the global economy could be quite different.

In addition, how international investors manage potential geopolitical risks may affect the duration of the current market rebound. For now, foreign investors may choose to wait for economic data to bottom out and for this new policy to consolidate. Once international long-term physical gold investors buy in, it could increase the sustainability of the current rebound in China's stock market.

The market rebound in the past week indicates the impact of undervalued valuations, light investor positions, and the right policy catalysts on the market. The forward price-to-earnings ratio of the MSCI China Index has risen from 9.1 times on September 24 to 10.5 times, roughly in line with the 15-year average. Therefore, from an expected earnings perspective, Chinese stocks are no longer very cheap.

Between the domestic A-share market and the overseas Hong Kong H-share market, the latter's relative discount still makes it look attractive. In addition, the technology and communication services industry may benefit from a cyclical recovery. Over the past three years, many tech giants have increased their operating leverage and profitability. Economic improvement can help investors better understand the efforts these companies have made to cope with regulatory changes in 2021/22, stricter cost control, participation in stock buybacks, and increased dividend payments.

In addition to Chinese stocks, investors can also choose other alternative products that may benefit from China's economic improvement. European consumer goods and commodities are two potential areas of focus. Although some investors may prefer to invest "China-like" through these ideas, this generally does not bring the same benefits as direct investment and may become complicated due to other exogenous factors. For example, an increase in Chinese strength usually means an increase in commodity prices, especially oil. However, Saudi Arabia and OPEC may choose to increase production to regain market share, offsetting the potential increase in China's oil demand.Asia's economic performance may also gain additional support due to China's demand for the region's export goods and tourism industry. This could promote a broader recovery in Asian stock markets, not just among semiconductor and tech hardware exporters.

China's choice of more aggressive economic support, along with global central banks beginning to ease monetary policy, makes the current global economic policy landscape favorable for risk assets. Even though China's stock market may face some short-term correction pressures after recent significant increases, Beijing's overall policy stance should reinforce our call for diversification in Asian and global stock market asset allocation.

In the early stages of market recovery, further revaluation of valuations is expected to sustain the current market rebound. However, this requires an improvement in profit prospects to support a long-term market rebound. If the economy responds positively, the latest policy measures could help support corporate earnings over the next 12-18 months.

Elsewhere,

Goldman Sachs added bullish comments in a report titled "China Strategy: If Not Now, When?" on Monday. The team, led by analyst Kinger Lau, upgraded the rating of Chinese stocks from "overweight" to "buy," and believes that both the MSCI China Index (2801.HK) and the CSI 300 Index have potential upside of 15% to 20%.

Other major banks, including HSBC Holdings and BlackRock, have also upgraded their ratings on mainland Chinese stocks in recent days, as they anticipate there is still room for the stock market to rise.

Goldman Sachs wrote in the report: "Over the past 1 to 2 years, many China observers may have suffered from 'policy fatigue,' with post-COVID policy execution generally considered unsatisfactory. Given the low market expectations, the latest easing package has surprised investors and changed the policy narrative in several aspects."

Strategists at Morgan Stanley, including Hong Kong-based Laura Wang, wrote in a research report that overheating in the A-share market and the implementation of the recent stimulus policies announced by the Chinese government are one of the risks investors should pay attention to during the rebound in China's stock market. This has intensified the skeptical attitudes shown earlier by other strategists and fund managers, who said they are waiting for Beijing to support its stimulus commitments with real money.