HONG KONG (Reuters Breakingviews) - Chinese shares are turning out to be an unconventional safe haven of sorts. Following the U.S. Federal Reserve’s emergency interest rate cut, U.S. equities fell while gold jumped, suggesting many investors are sceptical about the utility of looser money. The benchmark stock index in China, however, has improved by a world-beating 11% over the last month, as excitement about stimulus eclipses weak business activity.
The difference in sentiment is stark. Shanghai and Shenzhen are the only major global exchanges in rally mode – even neighbouring Hong Kong’s is retreating. Mainland markets have done so despite – or more accurately, because of – the accelerating drumbeat of terrible news about the Covid-19 epidemic that emerged from Hubei province late last year. Even as Western fund managers are starting to panic about potential virus damage, their Chinese peers are donning rose-coloured glasses.
The People’s Bank of China has already cut key lending rates, but just as in developed markets, monetary policy will probably find limited traction. Consumption and supply chains have stalled while shoppers and workers quarantine themselves. Export demand is weakening as the disease spreads abroad. Economic indicators in February, including the closely watched purchasing managers’ index, were grim. The 6% GDP growth target will probably be revised downward.
Stocks in the People’s Republic only occasionally track long-term fundamentals. Dominated by quick-hit retail traders, they are poor places to park retirement funds; the CSI300 index has yet to recover fully from the global financial crisis in 2008. But in China, cheap short-term rates, often combined with targeted industrial support, tend to boost share values regardless of the economic context. Such policies are usually announced because things are going badly. Monitoring Beijing, which controls liquidity and fiscal spigots, therefore becomes essential.
Some foreign asset managers like the way mainland bourses are disconnected from moves in New York and London. It can make them oddly countercyclical even if the underlying logic is flawed; after all, this $14 trillion economy is highly sensitive to overseas supply and demand. With other indexes responding rationally to the perceived virus fallout, China’s irrational optimism offers a hedge, albeit an unstable one, against risk.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.