The Chinese stock market rebounds. Check this before you buy.


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Alibaba shares surged amid reports it was building its own chips and that founder Jack Ma had visited Europe.

Greg Baker / AFP / Getty Images

The Chinese stock market is rebounding after being beaten for much of the year. Don’t be fooled into thinking it’s time to buy.

At first glance, it looks like this could be a top-notch buying opportunity. The iShares MSCI China exchange-traded fund (ticker: MCHI) fell more than 10% in 2021 amid concerns over the country’s technological crackdown, the implosion of the real estate giant


Evergrande Group in China

(3333.Hong Kong), and the slowdown in its economy amid Covid-19 eradication attempts. With the S&P 500 up more than 20% this year, a lot of bad news seems to be on track.

This idea has almost certainly crossed the minds of many investors. The MSCI China ETF gained 7.3% in October, almost three percentage points higher than the


S&P 500.

China’s struggling tech stocks strengthened further, with


Alibaba Holding Group

(BABA) up 22% amid reports he was building his own chips and founder Jack Ma had come out of hibernation to travel to Europe, and


Baidu

(BIDU) is up 18%.

These movements are too important to be continued. While the declines in Chinese stocks reflect a lot of pessimism, analysts remain far too optimistic, according to Georgiana Fung of Cirrus Research. Despite the fall in the market and the slowdown in the Chinese economy, earnings revisions have been strong, while the certainty of these estimates, measured by the relative lack of dispersion between them, all indicate a level of overconfidence in the market. results season approaching. “Currently, the rise in earnings expectations appears to be too strong,” writes Fung. “These warning readings signal lower expected returns ahead.”

The bigger problem, however, could be the lack of action by policymakers to stimulate the economy, which may be necessary for the Chinese stock market to maintain a rally. According to Thomas Gatley of Gavekal Dragonomics, it rebounds when private credit growth accelerates, but underperforms when credit growth slows.

It’s not hard to see why. When credit growth accelerates, it means demand increases, which should lead to higher profits for Chinese companies. And just like with the Federal Reserve, when the People’s Bank of China eases, liquidity often ends up in stocks. For now, private credit growth, based on the three-month moving average of the year-over-year change in private credit, continues to slow, although that may change in the coming months. “A real turning point in this indicator has not yet arrived, but is probably only a few months away,” Gatley writes.

So far, there is no sign of it. In fact, the market seems to have lost all hope that the PBOC will act to stimulate the economy, according to Janice Xue, rate strategist at BofA Securities. There was no mention of a rate cut at a press conference the bank held to discuss third-quarter economic data, suggesting it was not on the radar. But just because the PBOC didn’t mention monetary easing at the meeting doesn’t mean it won’t happen, writes Xue, who expects the central bank to do so by the end. of the year.

May be. But until the PBOC decides to ease up, it’s probably best to stay away from the Chinese stock market.

Are you interested in US Treasuries?

Write to Ben Levisohn at [email protected]


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