Sky-low Chinese Stock Prices Might Not Persist for Long

Sky-low Chinese Stock Prices Might Not Persist for Long

Crankin' Up Consumption in China: A Shift Towards Domestic Demand

China's economy is on the move, and domestic demand is the new driving force. With a hefty dose of government funding, the Chinese are aiming to spur their consumption, and stocks like Alibaba, Xiaomi, and others are set to cash in. Despite the Shanghai and Shenzhen stock exchanges still having room to grow, they're already stealing the spotlight with prices few other markets can match.

The Chinese government has had enough of relying solely on exports. It's a risky game, especially in these politically tumultuous times when free trade is under fire. If the proposed tariffs on Chinese imports, currently up for discussion in the US and EU, come into effect, it could mean trouble for China's economy, making it tricky to maintain the growth target of five percent (the IMF predicts a 4.6 percent increase for China in 2025).

The idea of consumption isn't new. Back in the day, investors were all eyes on the growing Chinese middle class, hoping they'd become the fuel for domestic economic growth. But the hype hasn't quite materialized, and exports still lurk as the primary economic pillar.

But China's president, Xi Jinping, isn't one to settle for second best. To give consumption a jump-start and put a bit more cash in Chinese pockets, the State Council has proposed a plan to increase household incomes. Quote: "We will vigorously promote consumption to expand domestic demand in all directions." To back this up, Beijing will support reasonable wage growth and introduce a mechanism to adjust the minimum wage. And to stop the population decline, the reversal of the one-child policy is on the table.

To achieve this, China is ready to shoulder a bit of debt. This year alone, it's taking on 1.5 trillion euros in new debt. According to Luke Bartholomew, deputy chief economist at asset manager Aberdeen, "Financial conditions in the country are as favorable as they have been since the global financial crisis."

The stock market is applauding the move. Since the start of the year, the CSI 300 index has seen a five percent climb, and it's risen by 25 percent over the last six months. Former investor favorites like Alibaba, Anta Sports, or Ping An are back in vogue. Xiaomi and electric vehicle maker BYD are doing well too. But the market still falls short of its 2021 highs—the CSI would need to rise by 45 percent to reach that level. Quite the feats, but achievable? The special plan includes the goal of "Stabilization of stock and real estate markets."

Attracting more buyers is exactly the aim. Steven Bell, an economist at asset manager Columbia Threadneedle, notes, "Because the Chinese government is becoming increasingly market-friendly, we have invested in Chinese companies for the first time in a long time." The reason? "There are attractive companies at reasonable prices outside the US again."

The world takes note. Stocks on the Shanghai and Shenzhen exchanges are currently trading at prices that are rare elsewhere. This phenomenon is known as the "China discount." The average price-to-earnings ratio (P/E) of the CSI 300 is 13 for 2025 and 11 for 2026, compared to 15 for the DAX and 20 for the Dow Jones. According to David Perrett of M&G's Asia-Pacific equities team, "China's stock market capitalization is disproportionately small relative to the size of its economy." Many stocks are trading at compelling valuations, and many companies are increasingly focused on maximizing profits and enhancing shareholder returns through higher dividends and share buybacks.

China's got some tricks up its sleeve. Apart from fiscal, monetary, and regulatory policies, enthusiasm for Chinese technology has been reignited. The country boasts leading positions in strategic sectors like electric vehicles and batteries, and a competitive industry. With an abundance of engineering talent and generous company investment, China's "human capital" is another advantage. In fact, according to the World Intellectual Property Organization, Chinese residents filed over 1.6 million patent applications in 2023, more than three times the number from the US.

For the first time since Xi Jinping took office as China's president and Communist Party leader in 2013, consumption has been declared the top priority of the state-directed economy. This shift is in line with recent economic data that offers hope. Retail sales grew by 4% in January and February, suggesting a firm foundation. Meanwhile, industrial production, the backbone of exports, has slowed but not too dramatically, growing at 5.9% in January and February compared to 6.2% in December—slightly beating the expected 5.3% growth.

But the persistent property crisis remains a potential obstacle for the effectiveness of these measures. Investment in the sector continues to decline, with a drop of 10.6% in 2024 and 9.8% in the first two months of this year. This discourages spending and encourages saving, which, on the bright side, means more funds for investment, especially in low-interest-rate environments where stocks are appealing.

The air in the People's Republic seems to be clearing. Beijing has doubled down on its efforts to boost the domestic economy and revive the stock market. "Early signs of stabilization in the property market and a recovery in the tech sector from a low base are evident," concludes an analysis by asset manager Nikko AM. And the cherry on top? Perhaps a trade agreement between the US and China could still materialize. Anything is possible in these times.

1. The Chinese government, aiming to reduce dependence on exports, has proposed a plan to increase household incomes to jumpstart consumption, planning to support reasonable wage growth and introduce a mechanism to adjust the minimum wage.
2. Despite the Chinese stock market already seeing a significant rise, China is willing to commit to taking on 1.5 trillion euros in new debt to further stabilize the stock and real estate markets.
3. As a result, the stock market is responding positively, with the CSI 300 index having climbed by 5% since the beginning of the year and 25% over the last six months.
4. The world is taking note of China's moves, as stocks on the Shanghai and Shenzhen exchanges are currently trading at prices that are rare elsewhere, creating attractive opportunities for investing in Chinese companies due to compelling valuations.

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