Why China's stock market is roaring after investors fled in 2024

Yahoo

15-03-2025

China's stock market is suddenly surging after a tough time in 2024.
A pro-tech shift from Beijing is spurring confidence in markets.
While economic challenges persist, sources say the government is correcting course.
China looks investible again.
The country's stocks are rallying, countering the notion that investors should avoid the world's second-biggest economy.
Though many on Wall Street have been bearish on China since 2023, its stock market is suddenly looking good relative to flagging US peers.
Just a year ago, investors fled China in droves as they lost faith in its post-pandemic economy, and the exodus quickly back an ongoing problem for Beijing.
Amid fear that China would buckle from deflation, unemployment, or its high debt environment, foreign direct investment last year hit its lowest level since 1992.
The CSI 300 Index, a benchmark of mainland shares, dropped over 45% from a 2021 peak to the end of last year.
But now, while US stock leaders have suffered big declines since mid-February, Chinese large-caps have achieved their best annual start since 2002.
While the S&P 500 is down almost 10% from its February all-time high, the CSI 300 has topped a mid-December high and is up about 5% year-to-date.
The moves are causing analysts to start paying attention.
Citi recently upgraded China stocks to "Overweight," while dropping its view of US stocks to "Neutral." Meanwhile, Bank of America has said that the country will outperform this year, predicting that the previously "unloved" tech stocks will gain ground on sagging US peers.
Before this year, many were skeptical about China's tech environment, which was weighed down by disapproval from Beijing officials. Since 2020, many of the nation's leading tech names have been caught in a regulatory "crackdown," making investors hesitant to put money to work.
But the government's changing approach toward the industry has been on full display in the past month, starting with President Xi Jinping's supportive remarks at a top tech symposium in February.
Pro-business undertones continued in this week's "two sessions," a set of concurrent policy meetings that outline the country's economic goals.
Ben Harburg, founder of Core Values Alpha, cited Beijing's recent embrace of its tech sector as one of several catalysts behind his firm's upside thesis.
Eighteen months ago, his company created the CoreValues Alpha Greater China Growth ETF on the idea that investors have become too pessimistic about China's economy and its tech sector.
"[Beijing] very clearly said: 'Our national growth will be driven by technology,'" Harburg told Business Insider. "So it is unequivocal now they will lean in on technology, they will be supportive of technology, will do everything in their power to stimulate, subsidize, de-regulate — whatever is necessary to help technology kind of win."
That's an alluring notion for stocks beaten down by an anti-tech narrative in recent years. As of late February, Chinese equities were trading at around a 50% discount compared to the US market.
But the perceptions of China's negative view of the space might have been exagerrated, Harburg noted.
"I don't think the Chinese government was ever an anti-tech as we were led to believe," he said, adding: "The world perceives it very differently, because [regulation] happens without any warning, and it and it kind of like just shocks people and throws them off."
The crackdown narrative has given Chinese equities room to run higher this year, as it's helped lower valuations which are now moving upward. But it also helped catch US investors by surprise.
Starting with China's DeepSeek tool, a flurry of competitive Chinese AI tools have debuted this year, upending confidence in America's leadership in the space and sparking a reevaluation of Beijing's market, Harburg said.
As the AI trade has waned in the US this year, China's AI-linked stocks have soared on the back of the latest announcements.
"Clearly, China is much further along than we were told," Harburg said.
There are still challenges though, and, so far, Beijing's focus on tech is only a sentiment shift, said Tianlei Huang, a researcher for the Peterson Institute for International Economics.
While positive signals were given, this remains a symbolic gesture without new policies. China's private sector—including tech— continues to face the same challenges that have pushed investors away since COVID, while confidence among entrepreneurs and consumers is at post-pandemic lows
"The reaction in the stock market to this [tech] symposium is, I think, actually a very sad thing," he said. "Nothing in substance has really changed in terms of policy, regulations, right? It's just an attitude change."
Many of the broader issues that have plagued China's economy are still in play. That includes a highly indebted real-estate sector and downbeat consumers, creating a deflationary environment from which investors have fled since 2023.
But Beijing might finally be waking up to this as well.
Over the past year, many of its stimulus measures have fallen short as they failed to target domestic consumers, which analysts agree are the linchpin to growth. Yet, during the two sessions, there was a new-found emphasis on domestic demand and private consumption.
By Friday, stocks rose as the government urged financial lenders to ease loan terms for consumer borrowers.
The shift toward domestic growth comes as China realizes it cannot reach this year's 5% GDP target by depending on trade, Huang said.
This was the case last year, as net exports accounted for 30% of GDP. It's not a sustainable number, and it's largely driven by product stockpiling from buyers worried about Washington's trade war.
It remains to be seen whether the 5% target is realistic, Huang said, though the sentiment shift is significant and should shape future policy.
But Harburg sees things in a much brighter light. Aside from the positive mood in tech, he noted that investor fears about China haven not been realized. There's been no major real-estate crash and improvements are beginning to show in first-tier cities.
"It doesn't happen for two years, three years, four years. And so the reality is, I think people are finally kind of fatigued with all of these stories that they were told," he said.
Read the original article on Business Insider