Yardeni Research remains cautious on investing in China, suggesting that more than just interest-rate cuts, relaxed financing, and fiscal stimulus would be needed to make China a more attractive investment than the U.S. or India.
Chinese stocks have faced significant pressure lately, with recent declines erasing gains from the stimulus-driven rally in September. “Investors seem to have lost confidence that government stimulus will solve the economy’s deeper issues,” Yardeni Research commented in a recent briefing.
“The brief surge in Chinese equities now feels more like a temporary spike.”
Exchange-traded funds (ETFs) tied to Chinese stocks have struggled. The iShares MSCI China ETF (MCHI) is set for a 5.6% drop this week despite a sharp rise on Wednesday. This follows a 7.7% loss last week. Other China-focused ETFs have performed even worse, deepening their October declines.
For instance, the Invesco China Technology ETF (CQQQ) and KraneShares CSI China Internet ETF (KWEB) each saw losses of around 7.5% this week, while the Invesco Golden Dragon China ETF (PGJ) faced a 7% drop, according to FactSet data. So far this month, these ETFs have all posted significant declines, with KWEB down nearly 5% and MCHI more than 2%.
“Beyond the risks of doing business in China, corporate earnings have remained flat for 15 years and have notably underperformed since 2022,” Yardeni added. “It’s easier to inflate national growth figures through local government projects, but you can’t manipulate corporate earnings as easily.”
China faces over $36 trillion in outstanding bank loans, tripling the U.S. figure. Yardeni compared China’s challenges to those the U.S. faced after the global financial crisis. Without a massive fiscal stimulus comparable to the U.S.’s pandemic response, China may struggle to boost growth and inflation, according to Yardeni.
Consumer confidence in China has plunged, and it will take more than higher stock prices to revive spending. Bloomberg recently reported that China’s housing minister is set to address measures for the struggling property sector, but Yardeni remains skeptical.
“Stimulating a heavily indebted economy out of a collapsed property bubble with easier financing might not be the answer. It will take time for balance sheets to recover after such extreme leveraging,” Yardeni concluded.
