"Chinese Stock Market to Rise Further for the Time Being" [Q&A]

Samsung Securities, Outlook on the Chinese Stock Market

On the 5th (local time), the U.S. Department of the Treasury designated China as a currency manipulator. This is the first time in 25 years since the Clinton administration in 1994 that the U.S. has designated China as a currency manipulator. On the 6th, an employee at the KEB Hana Bank Counterfeit Response Center in Euljiro, Seoul, is organizing U.S. dollar and Chinese yuan bills.
Photo by Moon Honam munonam@

[Asia Economy Reporter Hwang Junho] Following the United States, South Korea's stock market has retreated to the 2400 level due to the 'inflation shock,' but the Chinese stock market is showing strength. Jeon Jong-gyu, a researcher at Samsung Securities, forecasted on the 18th that this solo strength of the Chinese stock market is expected to continue for the time being, emphasizing the need to pay attention to the renewable energy and electric vehicle sectors.

What is the background of the US-China decoupling market?

The cause can be attributed to the completely reversed policies and economic cycles between the two countries. China experienced a panic market due to COVID-19 lockdowns in March and April, but since May, with the easing of COVID-19 restrictions, expectations for stimulus policies and passing the economic bottom have increased. While the US has intensified tightening due to high inflation burdens, China has strengthened stimulus policies to boost the economy. The US is expected to face an economic downturn following the 'giant step' interest rate hikes, whereas China's economy is expected to see a gradual recovery in the second half of the year after hitting the bottom in Q2 due to the easing of COVID-19 restrictions.

Is there no inflation burden?

Looking at the Consumer Price Index (CPI) for May released last week, the inflation gap between the two countries is the largest since 2010. While the US recorded a high 8.6% year-on-year inflation rate, China’s inflation stabilized at 2.1%.

China’s CPI stabilization can be seen as reflecting the high proportion of food and housing costs, government controls (limiting the pass-through from producer price increases to consumer prices), and economic recession. Pork prices in China are expected to stabilize downward through the second half of the year due to base effects, and with ongoing price adjustments in the housing market, the CPI target of around 3% set by policymakers is expected to be maintained in the second half of this year.

How strong is the economic stimulus?

At the State Council meeting on the 15th, Chinese Premier Li Keqiang stated, "There will be no excessive money printing," which is interpreted as a measure to curb excessive expectations for stimulus. This statement appears to reflect concerns that the sharp stock market rebound has raised expectations for stimulus too high, which could hinder policy implementation. In this context, the continuation of the stimulus stance and the expectation of passing the economic bottom in Q2 remain valid. Additional monetary easing and expanded fiscal spending (infrastructure investment and consumption promotion policies) are also likely from June to August. Considering COVID-19 risks, it is expected that stimulus intensity will inevitably increase before the Beidaihe meeting in August.

Will stock prices continue to rise alone after June?

It is expected that the favorable stock price trend of the Chinese mainland and Hong Kong markets compared to developed countries will continue for the time being. With a pro-market policy stance maintained for economic normalization, the third quarter is expected to shift from the Shanghai lockdown shock phase (April) to a recovery phase.

The key point is the speed of the rebound. The 'V-shaped rebound' seems to have concluded. Expectations for economic normalization (stimulus policies) have already been reflected in stock prices, and due to repeated COVID-19 outbreaks, fundamental recovery is likely to be slow. The trend of the Chinese mainland and Hong Kong stock markets in Q3 this year is expected to attempt a gradual index recovery while confirming the slope of economic recovery.

What is the portfolio strategy for Q3 this year?

Since the stock market trend will continue to be led by government policies, a concentrated trading strategy focused on "government policy beneficiaries" is recommended. Investment opportunities are expected to concentrate on government policies during the period when the Chinese government increases stimulus intensity ahead of the top leadership transition. Reopening (advanced manufacturing), deregulation (platforms), and green policies (electric vehicles, renewable energy) could be key items benefiting from government policies ahead of the top leadership transition this fall.

Along with China's production resumption, the government's promotion of domestic industries is establishing itself as a mid- to long-term theme. Since Q4 2020, platform regulations and common prosperity policies have caused excessive declines in growth representative stocks. The valuation attractiveness of platform representative stocks has sufficiently increased.

In this era of high oil price inflation this year, government investment in renewable energy and corporate development of electric vehicles are gaining greater momentum. China's solar and wind energy investments this year are expected to increase by 30-50% compared to last year, and new energy vehicle sales are expected to surpass 5 million units for the first time this year, following 3 million units last year.

This content was produced with the assistance of AI translation services.