Three millennia of Chinese history and the neonlit grandeur of Macau are a testament to the fact that passion for speculative assets is a recurrent theme across untold generations in the Middle Kingdom. Yet even I was stunned by the swiftness and intensity of the bull market in China/Hong Kong that began in late October after a sell off triggered by foreign selling after President Xi’s anointment to a third term with a Politburo packed with loyalists at the 20th CCP Congress.
Not even the softness in November retail sales, factory orders, external trade, credit growth and industrial production prevented the Shanghai, Shenzhen indices and the Hong Kong red chips from a spectacular bull run. Alibaba shares surged 50% from 60 to 91 before the recent pullback. Other domestic cyclicals almost doubled in two months.
The street protests against Xi and the CCP have obviously convinced the government to ease its draconian Covid-19 lockdowns, inject liquidity in the banking system, establish a $35 billion lifeline for heavily indebted property developers and adopt pro-cyclical policies to boost GDP growth beyond its current dismal 2.8% rate, a generational low.
After $1.2 trillion in losses since 2020, the Chinese stock markets were at historically depressed levels in terms of both valuation and positioning. Even now, Shanghai’s CSI 300 index trades at 12.8X forward earnings and the PBOC is the only major global central bank with the luxury to ease interest rates since inflation is only 3% in the PRC.
Yet, all is not hunky dory in the PRC now. A tragic spike in new Covid cases in Beijing has the potential to hit both global markets/crude oil and supply chains in a nation with more than 2 million factories. After all, it is impossible to make PC components and microprocessors from home.
China’s reopening can simply not happen if the Covid virus infects millions of people in its mega cities. Anecdotal evidence suggests that no less than 50% of Chinese bank employees in Beijing have tested positive in the last two weeks. Stock market trading volumes in Shanghai fell last week due to a surge in Covid cases among floor traders. It is only a matter of time before factories across China close and Beijing is forced to resume its draconian lockdown policy. It is thus prudent to take profits in Alibaba, JD and et al since even a benign macro/pro-growth policy milieu cannot offset the horror of a virus that has the potential to kill million elderly Chinese who never got their jab. The last thing the world needs is another China virus shock and I desperately hope the Xi Politburo defuses this nightmare timebomb.
Also published on Medium.
