Why is China’s stock market soaring, and will it last?

Chinese shares, measured by the CSI 300 index of domestically listed companies, have risen by 25% in nearly two weeks.

This has given a much-needed boost to struggling China funds, which have been under pressure since February 2021 after a strong run in the early days of the pandemic.

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Big movers since 23 September include Matthews China (29% bounce) and L&G MSCI China Ucits ETF (27% jump).

The three China investment trusts – Fidelity China Special Situations, JPMorgan China Growth & Income and Baillie Gifford China Growth Trust have also risen more than 20%.

Companies that make a lot of money from Chinese consumers, such as luxury goods groups LVMH and Burberry, also leapt in value.

The rally has been caused by the stimulus from Chinese financial institutions, such as the central bank and financial regulators. The measures include lowering benchmark interest rates and reserve requirement ratio for banks to expand lending, alongside plans to lower mortgage rates for outstanding loans, and measures to improve stock market liquidity and make it easier companies to buy back their own shares.

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The aim was to revive stock and property markets, which had been performing poorly: the CSI 300 lost nearly half its value from February 2021 to mid-September 2024.

Peiqian Liu, Asia economist at Fidelity International, said: “We believe these easing measures are positive surprises to markets and will be supportive of sentiment in the short term.

“Previously, markets have been expecting a more incremental and gradual approach in monetary policy easing, but this one-off announcement to lower benchmark rates signals the importance China places in supporting domestic demand.”

But more than just benefiting markets, investors are excited that the stimulus could have a substantial positive impact on the economy.

Kristina Hooper, chief global market strategist at Invesco, says that the rate cuts by the People’s Bank of China are significant and should have a positive impact on the Chinese economy. More importantly, the monetary stimulus will be accompanied by very substantial fiscal stimulus, she notes.

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Hooper adds: “While we don’t have a lot of details about the fiscal stimulus, the size alone is encouraging. Last week’s China equity rally was powerful and suggests this is what investors have been hoping for. What’s more, Chinese stocks are attractively valued, in my view, and I would not be surprised to see a continued positive impact as more details are released.”

The MSCI China index, which includes technology giants such as Alibaba Group Holding Ltd ADR (NYSE:BABA) and Tencent Holdings Ltd (SEHK:700), has a price-to-earnings ratio of 15, but traded on a 11.3 times multiple before its rebound. This is compared with about 22 times for the MSCI World index, according to data firm MSCI.

Does the rally have legs?

Despite the stimulus, the risks of investing in China remain. One concern for investors in China has been the influence of politics in business, which has held back technology companies and discouraged entrepreneurship. Another is geopolitics as tensions are high with Taiwan.

Legal & General Investment Management is more sceptical than some about the outlook for China. Its emerging market economists say that China will struggle to sustain any economic acceleration, and although the stimulus is impressive, it fails to address problems in the housing market, like too many properties and too little demand.

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They say it is not clear what the outlook for Chinese equities is and are therefore reluctant to chase the rally in shares.

“From a strategist’s perspective, Chinese equities are not clearly ‘cheap’. They may trade on low multiples, but the index multiple is close to the middle of the historical range, and there are plenty of challenges in working out the appropriate multiple for Chinese equities. But sentiment towards China was very negative, and we would not feel confident taking on a short at this stage,” they said.

Investors looking to add some Chinese equities, without going all in on the nation, could do so via an emerging markets fund.

Three feature on our Super 60 list of recommended ideas: Fidelity Index Emerging Markets, JPMorgan Emerging Markets investment trust, and Capital Group New World.

Fidelity Index Emerging Markets is a passive fund, costing 0.2% in annual fees. It has about a quarter invested in China, followed by around 20% in India and 20% in Taiwan.

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JPMorgan Emerging Markets is an active fund. The managers are underweight China, preferring Indian equities. They have 25% in India, followed by 18% in Taiwan and 17% in China.

Finally, Capital Group New World has just 9% in China. This fund is happy to own companies listed outside emerging markets, but which have lots of business in emerging markets. Therefore it has around a quarter invested in American equities, such as Meta Platforms Inc Class A (NASDAQ:META) and Microsoft Corp (NASDAQ:MSFT).

Investors looking to add a dedicated China fund could look at the Super 60-rated Fidelity China Special Situations investment trust. It trades on a -13% discount and yields nearly 3%. The largest positions are Tencent, Pony AI and Crystal International Group Ltd Ordinary Shares (SEHK:2232).