Thread by @andreasmoun

#WallStreet split on #China’s recovery after the bubble burst - Thread

However, according to a report by #Bloomberg, the recent policies of the Chinese Government has caused a divergence between #China and other financial markets of the world.

As China is witnessing a major economic slump in 2021, major wall street giants such as JP Morgan are predicting a bull run in Chinese Stock Markets.

However, according to a report by Bloomberg, the recent policies of the Chinese Government has caused a divergence between China and other financial markets of the world.

COVID19 pandemic has caused a major global economic slowdown including in China. The nation is witnessing a major slump in the housing market as prices of real estate have fallen drastically to their three-decade low(verify).

Evergrande, a Chinese Real Estate conglomerate, is battling a liquidity crisis since November 2021. Similar is the situation in other markets such as the tech market, as companies such as Alibaba’s shares have fallen sharply this year as well.

This is further fuelled by the government’s tight regulatory measures across the markets. This has caused a major variance in the Chinese Financial Market compared to other financial markets of the world.

According to Morgan Stanley Capital International China (MSCI) Index of Stock, the Chinese financial Market differs by 36 percentage points, which is the biggest gap since 1998. The difference in high yield returns is also as wide as 25% percentage points.

Similar is the trend for the housing market, where investors of the world are betting big on the safe housing market, the housing market in China is collapsing. Thus, the financial market in China is on a pretty low, if not at the lowest.

This has triggered various conflicting viewpoints in wall street. According to Marko Kolanovic, the MSCI China in 2022 will soar as high as 40%. He suggested investing big in China in 2022, the prices of the stocks are currently nearing the bottom.

However, such a bull run is based on major assumptions. The key assumption being the Chinese government will ease off the regulatory measures and support the financial market to prevent a market crash.

This is further strengthened by China’s Central Bank decision to cut Reserve Requirement Ratio (RRR) by fifty base points. Thereby, injecting almost 188 Billion dollars into the Chinese Economy.

However, the previous decisions of the government of China might carry their weightage in the recovery of the Chinese Financial Market in 2022. The Chinese government through various policies has imposed several strict restrictions on housing companies which

fuelled its bubble burst. The government also refused to bail out Evergrande of its biggest liquidity crisis. The government also imposed several restrictions on Chinese tech companies such as Alibaba.

The government also asked DiDi Global, the biggest cab-hailing app in China to delist from US Market. The government claimed that the listing into the US exchange could provide DiDi’s vast amount of data to foreign countries. Subsequently, the Chinese

Government launched a cyber security investigation against DiDi and removed the app from various app stores in China.

Thus, the investors such as Morgan Stanley have shied away from investing more in Chinese Equities. One of the largest funds on the Chinese Equity Market, the China Opportunity Fund of Union Bank of Switzerland (UBS), has fallen by 25% this year alone.

Similar losses were born by BFAM Partners, who will be reporting their first loss in almost a decade. This divergence can be seen in other segments such as

Biotech as the gap seems to be expanding in the wake of the US government announcement of its plan to ban some Chinese companies from using the USA’s technology.

However, it is not all gloomy for Chinese Markets as foreign investors continue to invest in China. Foreign Direct Investment(“FDI”) in China has increased by almost 16% year-on-year basis in 2021. Many Association of Southeast Asian Nations(“ASEAN”)

Countries and countries from belt and road initiative(“BRI”) are the major investors of FDI in China. It is worth noting that FDI in China has been increasing on regular basis.

In 2020, the FDI was up by 6% 2020. Thus, the foreign investors continue to show faith in the Chinese economy. Considering the current volatile state of Chinese Financial Markets, the risk-reward prospect is too big to pass up. According to Wendy Liu, a JPMorgan strategist,

the market is currently evaluating the bottom of the bear run of the Chinese financial market. Wendy claims that the investors are waiting on the credit trough and once capital comes that will propel the bull run for Chinese markets.