hey everyone, welcome to the Plane Bagel. I'm your host, Richard Coffin. It's been a couple of years since my finance feed on YouTube first informed me of the imminent collapse of China, and while the country and their economy have moved well beyond the initial doomsday deadline of 34 days by a couple of years now, it's pretty clear to see that the country has had a tough go recently. Ever since their intense lockdowns during the pandemic, they haven't managed to experience the sort of rebound that many other countries did. And with China still grappling with a real estate crisis and falling property prices, sentiment has been pretty negative. So, with all that and the US seemingly overdue for the predictions of YouTube to unfold, you might be shocked to hear that over the last few weeks, China's stock market became one of the best-performing markets of 2024 after a rise in stock prices, and not just any rising prices, but the strongest single-day rally for Chinese stocks since 2008, with the CSI 300 Blue Chip index and the Shanghai

Composite Index both rising over 8% over a single day and both climbing 30% from trough to peak in less than a month's time before settling lower. It seems that sentiment in the space has completely flipped, with the fear and greed indicator of the Shanghai Composite Index rising to its highest point since 2015 this past Monday. And as you would expect, this kind of performance has drawn a lot of attention back to Chinese markets. Chinese stocks have been in a pretty bad rut the last few years, given some of the factors we mentioned earlier, but this latest rally has driven such unprecedented demand into the stock market, specifically from domestic investors, that we've actually seen domestic brokers running overtime and running into technical issues, given the amount of accounts being opened. So, what's going on with China? Has their property crisis been cancelled? Well, no, but the recent rally has been tied to government announcements around a slew of stimulus measures that are being introduced to bolster the economy and attempt to put an end to the property

crisis, and given that China has been such a subject for pretty extreme claims one way or the other. I wanted to chime in and give a quick update on what we're seeing with the Chinese stock markets, what's causing this recent surge, and just check in overall since it's been a while since we've talked about China. As we've highlighted in past videos, the Chinese economy has been struggling with a number of headwinds over the last few years. There was the pandemic, which greatly impacted their economic output, the property crisis that began when the government started to crack down on over-levered property developers like Evergrande, and those developers in turn began defaulting on their obligations, which sent property prices downwards. And because real estate is such an important investment category in China, representing 70% of household wealth and roughly a quarter of GDP output, it's had pretty broad implications for their economy. The country experiencing bank runs, high youth unemployment, and overall weak consumer demand, which is in part

contributed to slowing economic growth and even periods of deflation or falling prices, which many economists view as a warning sign for a struggling economy. Up until recently, outside of some monetary stimulus measures and smaller interventions, the Chinese government hasn't really introduced any groundbreaking policies to try and offset this decline. This led many economists to question whether the country would be able to achieve its target GDP growth rate of 5%, something that, mind you, is even well below its historical rate. But in late September, it seemed that their approach had changed as Chinese leaders announced a slew of measures to try and support their economy. First, on Tuesday, September 24th, the governor of the People's Bank of China, Pang Gong Shang, announced a bunch of monetary stimulus measures to try and support the economy and stem falling property prices. With them, reducing the required reserve ratio for banks, effectively allowing them to lend out more while keeping less money on hand, lowering the minimum down payment for properties to 15%, cutting interest

rates not just for new loans but also outstanding mortgages, meaning that those who already have a loan on their property will see the interest rates they're paying decreased by .5 percentage points. And among a couple of other things, even announcing a program to encourage borrowing money for the purpose of investing, with the bank easing borrowing restrictions, introducing a 500 billion Yan swaps facility for financial institutions to borrow from to buy stocks, and a 300 billion Yuan fund that will offer cheap loans to commercial banks who want to in turn lend that money out to companies for the purpose of buying back their own shares. Measures clearly targeted at not just supporting property prices but also prices for publicly traded stocks, with the stimulus measures representing the largest intervention from the Central Bank since the pandemic. And if all that wasn't enough for you, on the following Thursday, Chinese leaders at the monthly meeting for the Political Bureau of the Central Committee of the Communist Party of China, or Poli Bureau for short, really got markets revving by

vowing to deploy sufficient fiscal spending to ensure the economy would meet its 5% economic growth target for the year, with notes including calls to increase the scale of monetary policies further. Hal the decline of the real estate market and promote the stability and financing of certain property projects, with the latter move seemingly being more notable as a marked a stark shift in the rhetoric of the party, uh, moving from a more cautious tone to one that increased confidence that the government would do whatever it takes to combat this decline. And as highlighted previously, all these announcements have been quite the boon for Chinese stock markets, which mind VI themselves have had a pretty uh tough few years. Not only did they struggle with lockdowns, uh, the property crisis, and just overall declining economic activity, but we also saw the government crack down on some of their largest tech companies, moves that naturally caused a lot of pain for some of the country's largest stocks, such as with Alibaba, a company that many of view as the Amazon of China, who lost nearly

80% of their value after the government fined the company and forced them to break off a number of their businesses over antitrust concerns. And although businesses were grappling with new Anti-Trust data and labor regulations domestically, they also faced the threat of their shares being delisted in the United States, something that would cut off these companies from the biggest financial market in the world and naturally hurt their valuations. And while the initial threat of being delisted in 2024 was put off by an audit agreement between the US and China, stocks for Chinese companies were still down roughly 25% from the end of 2021. But seemingly, these recently announced stimulus measures succeeded in boosting investor confidence, boosting the Shanghai and Hong Kong indices to their highest points in 2022, and drawing in investor demand, and not only from hedge funds and US traders interested in profiting from China's growth, but even from retail investors within China itself, with the country seeing record trading turnover and an unprecedented

wave of requests for opening trading accounts, even prompting some funds to introduce caps for how much investors were able to buy in. What makes this notable for China is that stock investing isn't particularly popular in the country. On aggregate, stocks make up a pretty small fraction of household wealth when compared to other nations, with Chinese citizens seemingly preferring to put their money into real estate. Not only because of restrictions imposed on investing in the country, but also because Chinese stocks have proven pretty volatile in the past, with many wondering if this will reflect a longer-term trend of interest in the stock market within China. And naturally, the whole rally of the market drawing a lot of attention elsewhere from outside the country, with many money managers seemingly dipping their toes back into Chinese stocks and returning after the market's mass exodus. But does this all really mark a turning point for China's property crisis, their stock market, and economy as a whole? Well, perhaps, but so far, economists have been pretty lukewarm on the stimulus.

measures announced to date, with a number of experts suggesting that these moves won't be enough to address underlying issues that are ultimately causing the country's struggling economy, with some further questioning whether the government will deliver on its vague promises for fiscal action. And in fact, this past Tuesday, we saw stocks reverse course with their biggest drop since 2008 after a disappointing press release by the chairman of the National Development and Reform Commission, which seemed to lack details on the promised further fiscal stimulus. So, while this does seem to mark a pretty clear shift in the Chinese government's approach with its property crisis, there remains a lot of work to be done there. While these measures improve liquidity for the markets, there remain problems around consumer confidence and whether we'll actually see higher lending activity even with this excess money available. And with real estate demand still on the decline, with new home sales falling 27% year-over-year in August, and large property developers like Country Garden still in financial turmoil and likely going through a painful deleveraging, and again with so much

household wealth tied to property values. The economy is very likely to require further intervention to avoid a more painful decline, with even hedge fund manager Ray Dalio highlighting that policymakers need to do what it takes, which will require a lot more than what was announced. And we'll just have to wait and see how things further develop for the people of China. Nonetheless, with all that, stocks still remain up quite a bit, which has still maintained a lot of attention from investors outside of China, especially with the Golden Dragon Index, an index which represents stocks listed in the US but who have most of their business within China, is still up over 30% even after its recent pullback. And naturally, a lot of individual investors are wondering whether now is the time to add Chinese positions to their portfolio. And of course, in line with all my other videos on this channel, I can't tell you what the right move is. I have no way of knowing whether the Chinese market will be the best-performing stock market.

Market this next year or the worst, but it is worth highlighting that while there might be opportunity within the Chinese market, Chinese stocks are a pretty tricky area to navigate. On the one hand, with over 17% of the world population living in China and their importance to the global economy, it's naturally a market worth keeping an eye on. Stocks are also relatively cheap when you look at things like PE ratios, and historically, while growth rates for the economy have slowed, the Chinese economy has had a high growth track record. So, if we saw recovery, it could really bolster performance. That all being said, on the other hand, there is a reason why stocks in the country are particularly cheap. Outside of the ongoing issues that we mentioned earlier, Chinese stocks have had concerns raised over the accuracy of their financial statements in the past, pretty meaningful and unpredictable geopolitical and regulatory risks. The Chinese government is very hands-on and controlling of their publicly traded stocks and has in the past made very drastic shifts in policy that hurt their

company's performance, and it's not just internally that these stocks face risk. There's also the United States, which itself has its upcoming election, and candidates like Donald Trump threatening a 60% trade tariff on Chinese goods if he is elected. And even outside of that, the US has in the past explicitly moved to restrict US investment in Chinese companies. Something that, if you currently have an investment in China, could hurt your return. So, the reason stocks are so cheap and volatile in China is because many investors have this genuine fear that any day one government or the other could introduce a change that strips away their entire investment, especially given that many North American investors actually invest in Chinese stocks through American depository receipts that actually reflect ownership of a Cayman Islands holding company with ties to the Chinese business rather than shares of the business itself, since China restricts foreign investment in certain industries. And this complex legal structure could put investors at risk if either country were to ever crack down on this quasi-equity arrangement. And while China is a very important economy and historically

a fast-growing one. It's important to recognize that growth of the economy doesn't always translate into growth of the stock market. In fact, one paper titled Economic Growth and Equity Returns found that between 1900 and 2002, these two variables actually had a negative correlation. In part, because economic growth can come from more companies entering the market rather than a handful of positions capturing all the growth, and the fact that large multinationals that are based elsewhere can capture some of that growth themselves. So, while the Chinese market does seem to have a lot of opportunities, you just need to be aware that it's a very different ball game from other stock markets. And we've seen the space experience drastic rallies and contractions, such as back in 2015, as well as false dawns, most recently, for example, in February of this year, where stocks climbed over 10%, only to eventually lose all of those gains. And in addition to doing your typical due diligence or researching a company, understanding the risks they face just

through uh the normal course of their operations. You do have to factor in these more unpredictable external forces uh when assessing a position and deeming how much of your portfolio you're going to invest. We could see stocks move higher and possibly even turn around on further stimulus announcements, with many investors expecting further measures to be announced this weekend. But these geopolitical and Regulatory factors really are unpredictable, no matter how much research you put in. And so, as an investor, you need to consider these unknowns when assessing risk here. And while we have seen this jump in Chinese stocks, that will only be sustainable if we actually see the fundamentals of companies follow through. Anyway, that's a video. Thanks for joining me today. If you like this video, please do make sure to like, subscribe, all that good stuff. It does help the channel tremendously. And let me know your thoughts on the Chinese market down below, uh, what your views are on the current economic situation, uh, whether you're interested in the space or you've been burned in the past and you never want to touch it again. Any and all

thoughts are welcome. Uh, thanks again for joining me, and as always, be safe out there.

What Just Happened With Chinese Stocks?

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I'm a CFA and CFP professional working as an analyst for an investment management company in Ottawa. I'm a huge finance nerd and am passionate about the field - I think people lack the resources they need to make educated financial decisions, and hopefully this channel helps with that!

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The videos on this channel are for education purposes only and do not constitute financial advice. Richard Coffin does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers and his content should not be used as a basis for investment trades.