China’s wild markets are a battle between fear and greed

The battle between fear and greed is wreaking havoc in Chinese financial markets.

While China bulls are finally getting some vindication as the nation’s stocks and bonds rally, the past week shows investors need to be prepared for violent swings. Take Country Garden Holdings, the nation’s largest developer. On Monday, its 2024 bond plunged 10 cents on the dollar to trade like a stressed asset, only to surge by a record 14 cents two days later. The Hang Seng China Enterprises Index was down for five straight days before rallying the most since July on Thursday.

After last year saw one of the worst relative performances in recent history for China’s markets, the country’s ultra-low valuations stand out. With the People’s Bank of China ramping up monetary easing this past week and pledging to do more, its dovish tone sets it apart from tighter policy in most major economies. Signs the Communist Party may pull back on its campaign against the real estate sector is adding to bullishness as traders look for alternatives to pricey global tech shares.

“We are starting to see more and more policy adjustments aimed at, what we see, as damage control,” said Citigroup strategists led by Dirk Willer. The “rally in property bonds is mainly short covering, but welcome nonetheless.”

There are plenty of investors, analysts and strategists staking their reputations on a 2022 rally in Chinese markets. Since the end of last year, Societe Generale SA, Goldman Sachs, BlackRock, UBS Group and HSBC have all turned overweight on the nation’s equities. JPMorgan Chase & Co.’s Marko Kolanovic in December recommended going all in on China this year, predicting the MSCI China Index would surge almost 40 per cent.

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SocGen strategists say Chinese shares account for 20 per cent of their global equity exposure in a multi-asset portfolio.

On the credit front, firms including Allianz Global Investors, Axa Investment Managers and Oaktree Capital Group have said in recent months that they’re looking to increase their holdings of beaten-down real estate debt. Jason Brown, a former Goldman special situations group head, raised an initial $245 million last month for his Arkkan Capital to invest in Chinese distressed property loans and bonds.

Such optimism has been repeatedly tested. The Hang Seng China gauge slumped to an almost six-year low earlier this month and the yield on Chinese junk dollar bonds surged above 20 per cent as risks to the economy mounted.