Investors should short Chinese bank stocks as policymakers turn to the nation’s commercial lenders to help reflate the property market at the expense of shareholders, according to BCA Research. They should buy consumer and auto stocks as monetary easing powers purchases.
This relative equity trade can be applied in both onshore or offshore markets, they argued in a report to clients.
With Beijing reaching its economic pain threshold, the government instructed banks to extend 1.88 trillion yuan (US$269 billion) to property developers to help them complete pre-sold homes in the next six months, a sum that includes 600 billion yuan announced in late November.
“Real estate developers will get little from homebuyers when they deliver these pre-sold units,” chief emerging markets strategist Arthur Budaghyan said. “As a result, developers will not be able to pay back [the] banks. Most of [the new financing] will become non-performing loans and bonds. Ultimately, bank shareholders will pay the price.”
BCA Research recommends buying consumer staples and auto stocks at the same time as China continues to pursue monetary easing to bolster consumption. A spike in sales recorded by BYD, the world’s biggest electric-car maker, suggests that policy is producing the needed impact.
Investors are banking on China to resuscitate the ailing property market and a roll-back of its zero-Covid policy as preconditions for a sustainable recovery in stock prices, after a drubbing for most of the past two years. The MSCI China Index, which tracks almost US$2 trillion of Chinese equities at home and abroad, has tumbled 23 per cent in 2022, making it the worst year since a 50.8 per cent crash in 2008.
Stocks in Hong Kong and mainland China have gained more than US$1 trillion of value since November 11, when the government started easing its stringent zero-Covid regime. Global investors have responded by snapping up US$8.5 billion worth of yuan-denominated shares last month, the most since June, according to Stock Connect data.
BCA Research cautioned the rebound may be challenged by a deepening slowdown, before the Chinese economy starts to recover from the second quarter of next year.
“Beware of zigzags and roundabouts,” the research firm said. “The Chinese economy cannot stage a meaningful recovery in the next several months due to persistent elevated uncertainty and the lingering risk of abrupt lockdowns, as well as a deepening contraction in its exports.”
The research firm upgraded its recommendation on A shares to neutral relative to global equities, after having downgraded them to underweight in March 2021. It maintained an underweight call on offshore Chinese stocks, saying the conditions are not ripe for a sustained recovery in equity prices.
Keyword: China’s state-ordered property funding plan will fuel bad loans, hurt shareholders, analyst warns