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Chinese Markets Climb as Bargain Hunters Look Past Economic Pain

By:Ilya Spivak

Chinese stocks are on pace for their best week in four months as investors’ outlook brightens despite thin economic growth. That’s because all of the “bad news” may be priced in for now.

  • Chinese stocks are on pace for their best performance in four months.
  • Investors’ outlook brightens even with China’s economy near standstill.
  • Recovery to continue if the news flow isn’t worse than expected.

Chinese stocks are on the rebound. The iShares China Large Cap ETF (FXI)—which tracks the FTSE China A50 index of the largest names on the Shanghai and Shenzhen exchanges—is on pace to add nearly 6% this week. That would amount to the best performance in four months.

Some of the rise is surely attributable to swelling market-wide risk appetite following supportive U.S. consumer price index (CPI) data. Nevertheless, domestic news flow has not disappointed.

Figures published this week showed industrial production grew 4.6% year-on-year in October, topping the expected rise of 4.4%. Still more encouraging, retail sales added 7.6% over the same period, sailing past forecasts penciling in 7% and marking the biggest increase in five months.

China’s economy remains weak even as data flow improves

While certainly encouraging in relative terms, such outcomes mark incremental outperformance rather than surging demand. Leading surveys of purchasing managers (PMI) published two weeks ago—an official set from the authorities in Beijing and an analog private-sector one from Caixin and S&P Global—put economic activity near standstill.

China Composite PMI: Economy Near Standstill
Data source: Bloomberg

Investors’ attitudes have brightened all the same. Foreign currency deposits increased for the first time in seven months in October. They still registered down 9.2% compared with the prior year, but that admittedly beefy number marked the smallest decline (and the first single-digit one) since August 2022.

Capital outflows pressuring the Chinese yuan have eased as well. The spread between the markets’ expected daily exchange rate to the U.S. dollar and the official one set by the People’s Bank of China (PBOC) has narrowed to the smallest since mid-August, erasing nearly three quarters of the historically wide disparity recorded in September.

Markets tied to China can recover as "bad news" runs dry

Analytics from Citigroup suggests Chinese data outcomes now skew toward surprising on the upside relative to expectations. This may indicate markets have already priced in the bulk of the bad news about the country’s disappointing performance following Beijing’s move to scrap “zero-COVID” lockdowns in December 2022.

Citi China Economic Surprise Index
Data source: Bloomberg

Financial markets are inherently forward-looking. Movement in asset prices is generated as expectations are continuously tested against outcomes. Where there are discrepancies, asset values move as portfolios are repriced to reflect realized results and the updated outlook for what’s to come next.

That means that economic weakness by itself is not an inherent hurdle for risk appetite if conditions are not worse than the markets are anticipating. Results need not be “good,” just “tolerable” enough for investors to nibble on bargain-hunting opportunities. For China-anchored assets, this looks to be setting the stage for continued recovery.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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