China’s latest stimulus package, aimed at reviving its economy, could trigger a significant rally in equities over the next six months, according to renowned China watcher Louis-Vincent Gave, managing director and co-founder of Hong Kong-based Gavekal Research. “I believe it’s the trade to do for the next six months.”
After months of economic stagnation, sparked by the Covid-19 pandemic, real estate crises, and geopolitical pressures, Beijing’s aggressive efforts to boost investor confidence are starting to have an effect. Gave’s prediction of a 100 percent rise in stock values signals a bullish outlook, yet it comes with cautionary notes on potential volatility.
Fresh stimulus
China’s economy has faced a barrage of challenges in recent years. A sharp slowdown in growth, triggered by the US-China trade war, a contracting property market, and waning consumer confidence, left Beijing scrambling to stabilise its financial outlook. Stocks have plummeted 60 percent from their 2021 highs, with real estate valuations dropping by 20-30 percent.
This bleak picture contrasts sharply with the actions China’s leadership has taken, and the dramatic steps implemented in the new stimulus package.
“China’s government wants shares to go up,” Gave said during a presentation to asset owners in Amsterdam on Tuesday, when asked by Investment Officer about the Chinese government’s move to restrict initial public offerings (IPOs), encourage share buybacks, and make it easier for retail investors to borrow on margin.
The government “is clearly doing everything to crank it up,” he said, referring to the aggressive measures aimed at boosting stock prices and encouraging share ownership.
Set for surge
According to Gave, widely regarded as a world-renowned expert on Chinese economic policies, the country’s equity market is on the verge of a massive surge. However, he also notes that many foreign investors, hesitant due to the political and economic uncertainties, will likely miss out on the early stages of this rally.
“Foreigners will be standing by and watching,” he remarked, adding that once the rally picks up speed, these investors will rush to join in, driven by FOMO (fear of missing out).
What follows, according to Gave, will be a cyclical pattern China has exhibited before: “Big steps, long periods of nothing, and then 100% up, and then nothing again.”
Economic transformation
Beyond the stimulus and equity rally, Gave also addressed a broader transformation taking place in China’s economy. Industrial policy has shifted, especially in the electric vehicle (EV) sector, where BYD and other firms have become leaders in innovation. Gave noted the exponential growth in this space, driven by a top-down mandate from the government to dominate the EV market.
China’s industrial strength is reflected in its ability to export cars, including new high-efficiency hybrids such as the BYD Qin model. These cars, which cost a fraction of their Western counterparts, offer superior quality and range, up to 2,000 km, positioning China as a deflationary force in the global economy. “The idea that you could be buying a Chinese car was laughed at five years ago,” Gave said, highlighting the country’s rapid progress.
Global impact
While Gave remains optimistic about the short-term outlook for Chinese equities, he warned of significant geopolitical risks. The potential devaluation of the yen could have a deflationary impact on China and the global economy, especially for countries like Germany, which rely heavily on Chinese imports. Additionally, rising trade tensions between China and the US add another layer of uncertainty. “China fears the US is really out to get us,” he remarked, alluding to Beijing’s concerns about geopolitical containment.
Gave also touched on the upcoming US elections, which he believes could lead to an improvement in US-China relations, especially if key figures like Antony Blinken and Jake Sullivan leave the administration. In the meantime, the prospect of further tariffs or protectionist measures from the US remains a major concern.
Further reading on Investment Officer:
- China: Tech titan or ticking economic time bomb?
- China’s sudden electric car boom stirs strategic concerns
- Fund radar: China’s once-glowing equities dimmed by economic turmoil