A Smarter Way to Play ‘China Bailout Roulette’
Will Beijing bring out its big bazooka to rescue China’s battered stock market? That is the billion-dollar question as investors try to time the bottom for Chinese stocks. But they might be wise to also look at some easier bets. Chinese stocks are off to a bad start in 2024, after doing poorly over the last couple of years.
Foreign investors have fled the country to chase other markets like Japan and India. And Chinese markets are trading at pretty cheap valuations already. China’s CSI 300 index trades at 10.4 times last 12 months earnings—compared with a 10-year daily average of 12.5, according to Wind.
Hong Kong’s Hang Seng Index trades at an even deeper discount: eight times earnings, against an average of 12.7 times over the past 10 years, according to FactSet. Both benchmarks are hovering around half of their 2021 peaks. That is why a bit of good news—potentially, at least—has sent China’s markets into a tizzy.
Bloomberg reported Tuesday that Beijing is considering spending up to two trillion yuan, the equivalent of $282 billion, to support the stock market, possibly using cash stashed offshore by state-owned enterprises. That is a big sum: It is equal to around 8% of the free-floating capitalization of mainland Chinese stock markets, according to Morgan Stanley. There is no official confirmation and it is unclear whether the plan will actually become reality.
But it has been enough to lift sentiment, which had already sunk to abject levels. China’s central bank also announced a 0.5 percentage point cut to banks’ reserve requirement ratio Wednesday—providing a further boost to punters’ spirits. The Hang Seng Index has now risen 6.3% in two days.
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