China’s authorities are stepping up efforts to stabilise the stock market after a massive selloff. The collapse in valuations since a peak in 2021 makes them the world’s “best value proposition,” according to at least one market veteran. Others remain unconvinced, saying the economy faces some tough challenges which will keep hampering stocks. So is this a golden moment or a value trap?

How bad has the equities rout been and what’s behind it?

Few equity markets in the world have fallen as much as China and Hong Kong. The CSI 300 benchmark for shares traded on the mainland declined for the third straight year through 2023 and has lost another 2.6%. A Hang Seng gauge of Chinese stocks trading in Hong Kong fared worse.

Investors started selling out in 2021, when China’s private sector crackdown went into full gear. Covid Zero restrictions further worsened sentiment toward the market. Stocks staged a strong rebound through late 2022-early 2023 as China reopened its economy, but the optimism has all but evaporated.

A prolonged property slump, growing deflationary pressures, tensions with the US and structural problems including a shrinking population are making investors doubt the market’s long-term potential.

What’s that done to valuations?

The CSI 300 Index has fallen more than 40% from its 2021 peak while the Hang Seng China Enterprises Index has lost over 50%. In all, roughly $6.3 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since their highs. That means their valuations are near historically-low levels and on measures, the cheapest-ever against peers in major markets like India and the US.The HSCEI gauge now trades at about 6.5 times forward earnings estimates, below a five-year average of 8.5. Compare that to readings of roughly 20 for S&P 500 and India’s Nifty 50 Index – markets that saw hot rallies over the past year. At such low valuations, theoretically, upward potential is strong.

What are authorities doing to help out?

As the economy and equities struggled, policymakers have taken a series of actions – but none were deemed sufficient. Investors betting on a bazooka of stimulus – like the ones seen during the global financial crisis – were left out in the cold. Measures including ETF purchases by state funds, lowering stock trading stamp duties, and limits on new equity listings provided a short-lived rebound at best.But authorities have ramped up their support recently, leading to hopes that this time may be different. Stocks have responded with a rare three-day advance this week.

Bloomberg reported on January 23 that policymakers are considering a stock market rescue package which includes about 2 trillion yuan ($279 billion) to buy shares onshore through the Hong Kong exchange link. A day after the news broke, the People’s Bank of China said it will cut the reserve requirement ratio for banks and hinted at more support measures to come. Now all eyes are on when the reported rescue plan will be finalised.

Does that make China stocks a ‘screaming buy’

While it’s tempting to enter the market amid early signs of a rebound, skeptics warn that nothing fundamental has changed. China has yet to find ways to resuscitate the property market, convince consumers to spend, and prevent a deflationary spiral. The upcoming earnings season will likely be lackluster. Those repeatedly burnt during the year’s long rout are now once bitten, twice shy. Investors are also well aware that Beijing’s policies can shift at a whim and are wary of being disappointed again if the stimulus underwhelms.

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