While some are still obsessing over Beijing's crackdown on Chinese companies and would rather wait for the smoke to settle (i.e., Ark Invest's Cathie Wood), others are piling into mainland China's equities at breakneck speeds.
Bloomberg data shows overseas investors purchased 48.8 billion yuan ($7.7 billion) via trading links with Hong Kong between Dec. 6-10. The record inflows helped boost the country's main equity benchmark CSI 300 by 3% on the week, the best weekly gain in three months.
As we noted last week, the buying comes as strategists from Citigroup Inc. and UBS Global Wealth told clients Chinese companies' American depositary receipts (ADR) corrections were "overdone," and maybe now is the time to start buying beaten-down names.
We've pointed out in recent weeks that China has begun to ease. On Dec. 6, the PBOC cut the RRR by 50bps, effective on Dec. 15. "The aim of the RRR cut is to strengthen cross-cyclical adjustment, enhance the capital structure of financial institutions, raise financial services capabilities to better support the real economy," the PBOC said.
Ahead of the RRR cut, we told readers it was a telegraphed move by Premier Li Keqiang. He said that authorities would cut the RRR at an appropriate time to help smaller companies. The decision comes as Beijing is counteracting growth pressures and stabilizing the economy amid a years-long crackdown across technology companies and the property market.
Besides easing on the monetary front, Communist Party's top leaders said last Friday after a three-day annual Central Economic Work Conference that a priority early next year is "ensuring stability." This means that fiscal policy will be ramped up to support growth, presumably ahead of the Beijing Winter Olympics in February.
"Fiscal policy is expected to play a main role in supporting growth next year," said Ding Shuang, chief economist for Greater China at Standard Chartered Plc, while housing policies will see "fine-tuning" rather than a significant shift, he added.
Goldman Sachs told clients last week that another RRR cut is slated in the next few months.
China is in the midst of a policy shift to counteract the downward economic pressure. Foreign investors are already front-running the PBOC and buying Chinese stocks despite a liquidity crisis at developer China Evergrande Group and other real estate firms. It's a risky gamble to catch a falling knife.