Last week, U.S. hedge funds swiftly acquired Chinese stocks during a three-day buying spree ending Jan. 25, the most rapid pace in more than five years, according to a Goldman Sachs report. Additionally, Chinese equity funds saw investors put in $12 billion last week, the second-largest inflow ever, Goldman Sachs and Bank of America said in separate notes. This heightened interest in Chinese stocks came shortly after reports that Beijing was finally taking action to bolster China’s battered stock market.
The Chinese government is considering mobilizing a 2 trillion yuan ($278 billion) stock market rescue plan, funded by offshore accounts of state-owned enterprises (SOEs) buying domestic stocks, Bloomberg reported last week. This plan aims to stimulate growth in Chinese and Hong Kong stock markets, which have shed $6 trillion in market value since their 2021 peaks and remain at five-year lows, despite previous stimulus attempts. China’s Premier Li Qiang called for “forceful steps” to address falling investor confidence. China’s top securities regulator also announced curbs on short-selling to further mitigate depressed valuations. In the days following these announcements, buying sprees domestically and among U.S. investors resulted in Chinese indices rising momentarily before falling back down later.
Ray Dalio’s Bridgewater Associates, the world’s largest hedge fund by assets under management, told its investors that the firm is “moderately bullish” on Chinese stocks and bonds and that they are worth holding for the long term. Bridgewater fundraised a new round from Chinese investors in mid-January, doubling its assets in the country.
U.S. businesses operating in China are expressing greater optimism about potential profitability compared to a year ago, according to a survey released this week by the American Chamber of Commerce in Beijing. Despite this positive outlook, the majority of the businesses in the survey said they will continue to restrict new investments in the country.
“If the only reason you’re getting inflows is because prices are very depressed and the government announces some investments, bans on short-selling, reduced online criticism of the stock market, that doesn’t strike me as an optimistic story,” Joseph Foudy, an economics professor at the New York University, told Observer. He added that he does not view China’s potential stimulus package “as an effective tool to jumpstart the economy.”
“If the market is only going up because you have put a lot of controls on the market, then all those things are going to be viewed as negatives, not positives,” Foudy said.
China’s stock market slump reflects a depressing economic environment: the country faces an ongoing property sector crisis driven by massive debt-funded over-construction, resulting in the collapse of behemoth real estate developer Evergrande among many others. The property sector accounts for 30 percent of China’s GDP and 70 percent of how the country’s citizens store their wealth, rippling the crisis from real estate to the wider economy. Youth unemployment is at a record high around 20 percent, and consumer prices are falling. In 2023, China posted a 5.2 percent GDP growth, a number that many economists believed was artificially inflated. Even taken at face value, 5.2 percent is far below the double-digit growth China had enjoyed in the late 2000s. “The era of high growth in China is over,” Foudy said.
China’s stock market is heavily regulated, and the country maintains a “closed” capital account, meaning investors cannot move their money in and out of the country without adhering to strict regulations. U.S. hedge funds’ buying spree of Chinese stocks last week was mostly through U.S.-listed shares of Chinese companies, called ADRs. China’s stock market stimulus package would be enacted through state-owned enterprises taking money from accounts abroad and funneling it through an exchange connecting the Hong Kong stock market to mainland-based ones.
In the long term, China faces numerous headwinds: an aging population, sky-high government debts, and a political environment that prefers SOEs to private companies. More than 60 percent of the total market cap of China’s 100 largest companies are state-owned, according to the Peterson Institute for International Economics, meaning overall valuations in the country inevitably reflect sentiments towards the government and its ability to handle the economic crisis.