China’s Economic Recovery Helps Drive Its Stocks Higher

Chinese stocks have fared better than their U.S. counterparts for much of this year. The new coronavirus first emerged in the city of Wuhan in late 2019, and Chinese authorities later imposed lockdowns, travel restrictions and quarantine measures across the country to prevent the respiratory disease known as Covid-19 from spreading widely within its borders.

After a historic decline in the first quarter, China’s economy grew 3.2% in the second, and companies including industrial manufacturers and retailers have experienced a resurgence in global and domestic demand. The International Monetary Fund said it expects China’s real GDP to grow 1% for the full year, while global growth is projected to be negative 4.9%.

The CSI 300 index, which tracks the 300 largest stocks on mainland Chinese exchanges has gained 12% since the start of the year, versus a 3.6% increase in the S&P 500 stock index.

Stocks of Chinese food and beverage companies, as well as tourism and duty-free retailers have rallied, as have shares of auto makers and brokerages. Energy, banking and transportation stocks have lagged behind.

“The good performance of the markets is largely in line with China’s strong performance in containing the virus and having a solid framework for keeping it that way,” said Homin Lee, Asia macro strategist at Lombard Odier.

Some analysts and large investors are expecting Chinese stocks to continue climbing in the coming months. The country’s onshore markets, which are dominated by tens of millions of individual investors, are somewhat insulated from geopolitical tensions and uncertainties around the U.S. presidential election in November.

The outcome of the U.S. election doesn’t matter to most Chinese companies whose ownership and business operations are largely domestic, said Jim McCafferty, joint head of Asia-Pacific equity research at Nomura in Hong Kong. The relatively closed nature of China’s markets can also be seen in the large price difference between stocks that are listed on the mainland as well as in Hong Kong.

Mom-and-pop investors in China have been energized by the economic rebound, as well as a hot domestic market for initial public offerings. In August, retail sales returned to pre-coronavirus levels and chalked up year-over-year growth for the first time in 2020. Investors have also rushed into new mutual funds that invest in domestic equities.

The speed of China’s economic recovery, however, could be derailed by the worsening spread of the coronavirus in many other countries, which could weigh on global demand for Chinese-made products and exports. The world-wide death toll from the pandemic reached one million on Sept. 28, according to Johns Hopkins University data. As of Sunday, there were nearly 35 million confirmed cases globally. China has reported about 85,000 coronavirus cases, including about 4,600 deaths.

“Covid is still an X-factor,” said Howard Wang, a portfolio manager and head of Greater China equities at J.P. Morgan Asset Management.

The availability of vaccines will also determine how long it takes for global economies and demand to bounce back, which has implications for China’s export sector. About 170 Covid-19 vaccines are in development globally, according to the World Health Organization, and several are in final testing rounds, but a commercially available U.S. vaccine could still be at least months away. China, however, started what it calls “emergency use” of coronavirus vaccines for medical workers and border-inspection officials in July.

Policy makers in Beijing, meanwhile, have levers to pull if they need to spur growth. They still have ample room to cut rates, boost credit or increase fiscal spending, said Lombard Odier’s Mr. Lee.

Credit Suisse AG has forecast further gains for the CSI 300 index, which it said could hit 5500 by year-end. That would be a nearly 20% gain from current levels and a 34% increase for 2020. The index was last above 5000 points in June 2015, before a historic crash in Chinese stocks that year.

Edmond Huang, head of China equity strategy at Credit Suisse, said China’s recovery on the ground has been unmatched, following its containment of the virus, and the market is benefiting from more investments from individual investors, as well as foreign funds.

Alexious Lee, head of China strategy at Jefferies, predicts the CSI 300 will rise by an additional 9% by year-end. He said that if a Chinese vaccine for the coronavirus becomes available, it will be a boost to the economic outlook. “It won’t impact the fundamentals,” he added, but would improve sentiment.

Write to Chong Koh Ping at [email protected]