China A-shares: The dragon reawakens

The CSI 300 was up 2.24% at the time of writing (27 September 2024), in response to news of China’s policy blitz. The barrage of easing measures covered many areas - including rate cuts (policy rates and the reserve requirements), further relaxation of housing regulations (mortgages and downpayments), the use of the central bank’s funding to buy stocks, and more support to buy unsold homes.

Given how cheap Chinese stocks have gotten, a rally could be on the cards, especially if the government support of its capital markets is undertaken with the management of structural problems the Chinese economy faces.

This comes at a time when the economy is finding it harder to achieve the “around 5% GDP growth” target. The policymakers have been cautious not to cut too early as the interest rate differential with the US has notably widened since 2022. Now with the outsized 50bps cut in the September FOMC meeting, the opportunity has presented itself for monetary easing in China.

What are the policies China has announced in September?

The reserve requirement ratio (RRR), or the amount of cash Chinese banks must keep in reserve, will be lowered by 50 basis points (bps). That will unleash 1 trillion yuan (A$142 billion) in liquidity. It was indicated that there could be further cuts of 25bps to 50bps this year.

There were some positive developments to alleviate the property downturn, including:

• reducing interest rates on existing mortgages by 50bps on average; and
• the down payment requirement ratio will be lowered to 15% vs. 25% previously for second-home purchases.

There will also be a ramp up of the housing buyback relending effort to clear excess unsold units, with China’s Central Bank PBoC’s funding support ratio increasing from 60% to 100%.

Another measure announced was that the PBoC will allow securities firms, funds, and insurance companies to tap central bank funding to buy stocks in the form of swap. A separate specialised relending facility will also be set up for listed companies and major shareholders to buy back their own shares.

How did China’s markets respond to the new policy announcement?

The equity market welcomed the announcements with revived optimism with the second largest daily return since 2020. While that rally did not sustain, we think this time could be different, in that these policies would be more effective and broad-based to boost the real economy. For example:

• Lower mortgage rates will reduce the burden of homeowners, freeing up cash for consumption.
• For SMEs especially in the fields of science and technology, tapping into PBoC’s funding would allow them to grow with more ease.

Highlighting broader global confidence in the measures, iron ore and steel both rose on the back of the announcement.

Now could be the time to allocate in Chinese equities again, with more policy coordination on the monetary and fiscal side.

Accessing China mainland

There are limited ways though in which Australian investors can acquire mainland China A-shares. VanEck has two ETFs that provide investors a way to participate in what may be the next growth phase for A-share investments.

1. VanEck FTSE China A50 ETF (CETF) - Australia's only dedicated China A-shares market benchmark exposure. It is the most cost-effective beta ETF exposure to China A-shares in the Asian region. CETF is diversified across companies and sectors, comprising the largest and most liquid mainland China companies considered leaders in their sectors and pillars of the Chinese economy.
2. VanEck China New Economy ETF (CNEW) - gives investors easy access to China A-shares and the enormous potential growth opportunities in what are described as China’s ‘New Economy’ sectors, namely technology, healthcare, consumer discretionary; and consumer staples.

CNEW Invests in 120 fundamentally sound and attractively valued companies assessed on 24 fundamental indicators across four analytical categories: growth, value, profit and cash flow.

Key risks: An investment in CETF or CNEW carries risks associated with: China, financial markets generally, individual company management, industry sectors, ASX trading time differences, foreign currency, sector concentration, political, regulatory and tax risks, fund operations, liquidity and tracking an index. See the PDS for details.