Stock market record highlights China’s swift recovery from pandemic

Stephen MulrenanWednesday 4 November 2020

In mid-October, the value of Chinese equities climbed above $10tn for the first time since 2015, to reach a record $10.08tn – an increase of $3.3tn since March. Meanwhile, the Chinese currency rose 3.9 per cent in Q3, the most in 12 years. The figures come despite China being the epicentre of the Covid-19 pandemic at the beginning of 2020.

The record high was recorded in the context of returning investor bullishness – despite the four per cent drop in German and French indices on expectations of further Covid restrictions, and a myriad of extraordinary economic headwinds such as Brexit and a surge in Covid cases. Investor attitudes can be at least partly explained by the one-time possibility of a fresh fiscal stimulus deal in the United States before the presidential election on 3 November.

Following optimistic comments by House Democrat leader Nancy Pelosi in mid-October, US futures climbed, London’s FTSE gained 0.6 per cent, Germany’s DAX jumped 0.9 per cent, and the Europe-wide STOXX 600 rose by 0.8 per cent. In Asia, Hong Kong’s Hang Seng Index gained 0.5 per cent, Japan’s Nikkei Index jumped 1.1 per cent, and South Korea’s KOSPI rose by 0.22 per cent.

China’s ability to subsequently attract foreign capital has been possible because the country has increased its international exposure and presence

Massimiliano Danusso
Conference Quality Officer, IBA Capital Markets Forum

‘The possibility of a fresh fiscal stimulus shot in the world’s largest economy acted as a catalyst in driving global stocks higher,’ says Nigel Green, Chief Executive Officer and Founder of financial consultancy deVere Group.

One company riding the wave is Chinese Fintech firm Ant Group. The company was bookbuilding for a planned initial public offering (IPO) that was expected to raise up to $34.4bn. The IPO would have been the world’s largest stock market debut and the first simultaneous listing on the Hong Kong Stock Exchange and Shanghai’s year-old Nasdaq-style STAR Market.

However, in early November the IPO was suspended by the Shanghai stock exchange following a meeting between Ant Group and Chinese regulators. The reasons for the suspension have not been disclosed as of the time of writing. Ant Group has stated that it will maintain close communication with regulatory authorities and the Hong Kong and Shanghai bourses.

Following a Covid-driven 6.8 per cent contraction in China’s economy in Q1 of 2020 – the first such slump in almost half a century – large amounts of money have been flowing back into China and Hong Kong from large institutional investors in the US and Europe. China’s economy was already recovering by Q2, with growth reaching 3.2 per cent, while a growth rate of 4.9 per cent was recorded between July and September compared to the same quarter in 2019.

Part of the reason why the Chinese economy has managed to rebound so quickly has been its handling of the pandemic. There has been speculation around whether China battled with an early version of the virus before a mutated version hit Europe and elsewhere, or whether blood type or obesity levels are a factor. What’s clear is that China’s early use of draconian lockdown measures certainly helped.

‘A decisive element has been China’s capacity to take mitigating measures with its production and industries, particularly in the region that was most severely hit,’ says Massimiliano Danusso, Conference Quality Officer on the IBA Capital Markets Forum and the managing partner of BonelliErede’s London office. ‘But China’s ability to subsequently attract foreign capital has been possible because the country has increased its international exposure and presence.’

The fact that the softness of the global economy has not slowed China down as the year has progressed has surprised Robert Lewis, a senior international counsel at Zhong Lun in Beijing. ‘I thought the rolling nature of the pandemic and the economic impact would have a continuing dampening effect on the Chinese economy but obviously it doesn’t seem to be working that way,’ he says.

‘One of the other things I predicted was that if China emerged first, which it has, international companies would not “decouple” from China as was predicted,’ adds Lewis.

Foreign direct investment (FDI) into China has continued to grow throughout 2020 and this includes a six per cent year-on-year rise in US investments for the first half of the year. ‘What that demonstrates to me is that capital chases returns and that China is the bright spot of the global economy,’ says Lewis.

The $3.3tn increase in the value of Chinese equities since March is, in part, due to recent reforms in China’s financial sector. For example, before Covid-19 hit, China announced a firm timetable for opening its futures, brokerage and mutual fund sectors to foreign investors. Limits on foreign ownership of securities firms are also due to be removed.

In addition, at this year’s National People’s Congress, the Chinese Communist Party introduced a number of stimulus measures as part of its post-Covid relief package. This included spending approximately $1.4tn on a digital infrastructure public spending programme – on building 5G networks, artificial intelligence, the Internet of Things, intercity high-speed rail, and setting up research and development institutions.

Other measures included continuing to implement reductions of value added tax rates and pension contributions for staff paid by companies and opening up lending by large commercial banks to smaller scale privately-owned companies.

‘Currency flows are not going to be as restricted coming into China,’ says Lewis. ‘To attract that much additional capital, there has to be a growing economy but there also has to be some liberalisation in the financial sector and in currency controls.’

Given that China is the only economy in the world showing positive gross domestic product (GDP) growth this year (at 1.9 per cent) – with the International Monetary Fund (IMF) predicting 8.2 per cent GDP growth in 2021 – Lewis says that China views US attempts to contain its growth as a hallmark of the US’ decline.

According to the 2020 World Economic Outlook report by the IMF, China’s $24.2tn economy is already larger than the $20.8tn US economy, via the IMF’s purchasing power parity yardstick. ‘Covid has accelerated this trend,’ says Danusso. ‘The way China has managed this crisis has been much more effective than in the US, so China’s ability for a faster recovery has clearly been a factor in overcoming the US in terms of growth.’