In September, the Chinese stock market staged a dramatic comeback. Before the 23rd, the market continued its previous sluggish trend, with declining volumes and most investors feeling despondent. On the morning of September 24, leaders from the central bank, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission held a press conference at the State Council Information Office to announce financial support for high-quality development. Pre-conference market expectations were generally high, and the stock market initially rose after opening but gradually retreated. It wasn't until Governor Pan Gongsheng answered the last question and announced the introduction of two new policy tools to support the capital market that the stock market surged back to life, accelerating upward. On that day, the Wind All A Index rose by 4.03%, marking a rare large bullish candlestick. In the following four trading days, Chinese assets, including Hong Kong stocks, U.S.-listed Chinese stocks, and A-shares, were fervently pursued by both domestic and foreign investors. There were three consecutive trading days of large gaps up, which is a rare occurrence. On the last trading day before the National Day holiday, September 30, the trading volume of the Chinese stock market reached a historical high of 26,115.20 billion, breaking the previous record of 23,576 billion set on December 3, 2014. On that day, several major A-share index futures closed with a 10% limit up. The monthly gains for September were 22.21% for the China All A Index and 20.97% for the CSI 300 Index. The last five trading days of September swept away the bearish shadow of the first eight and a half months of the year, recovering all losses for the year and even setting new highs. By the end of September, all major broad-based A-share indices had turned positive for the year, with the China All A Index and CSI 300 Index showing annual gains of 8.2% and 17.1%, respectively.
We have consistently maintained that the later stages of a bear market, especially during periods of "suffocation and despair," are essential conditions for making the most successful investment decisions. In the later stages of a bear market, facing cheap assets, holding cash is a short-term comfort but a long-term mistake. During this phase, one should persist in making short-term painful but long-term correct decisions! It is crucial to select high-quality, undervalued companies to hold as core positions (the viewpoint in the September monthly report noted that the market already exhibited characteristics of suffocation and despair). Because our team had made thorough research preparations in advance, our positions were already relatively high before the 24th. After the press conference on the 24th, we quickly raised the positions of products that could be increased to an actively aggressive level. As a result, our products achieved good returns in this round of rebound. Year-to-date, the main products under our management have significantly outperformed the CSI 300 Index benchmark.
Three bullish candlesticks change beliefs, and thousands of troops come to meet! In just five trading days, the A-shares have undergone a dramatic transformation. Why was the market's reaction to the policy this time so intense? How should we view the policy signals conveyed by the financial policy press conference on September 24 and the Politburo meeting on September 26? What level of market movement is this? In this issue of WE THINK, we will explore these three questions that are of common concern.
Why such rigorous reaction towards the policy this time? Confidence and more precious than gold
On September 24, the regular morning meeting of our research team ended slightly earlier than usual, with the purpose of watching the live broadcast of the press conference by the leaders of the "One Bank, One Bureau, One Commission." As I watched, I noticed that Governor Pan's language had some differences from the past. Since the 18th National Congress, the central bank has implemented several interest rate cuts and reserve requirement ratio reductions, but each time such good news was announced, it was usually followed by the discouraging statement: "We will not engage in large-scale water release." On that day, after announcing simultaneous cuts in reserve requirements and interest rates, as well as lowering the down payment ratio for home purchases and the interest rates on existing home loans, Governor Pan not only refrained from making the "no large-scale water release" statement but also emphasized that if necessary, there could be further cuts in reserve requirements or interest rates within the year! This was a refreshing and significant change!
In fact, the terms "tightening monetary policy" and "large-scale water release" are both neutral. The central bank "tightens" when the economy is overheating and engages in "large-scale water release" when the economy is cooling. This is standard macroeconomic practice. The Federal Reserve often swings between these tools; during the "subprime mortgage crisis" and the "pandemic crisis," it fully opened the taps for monetary easing. In 2023, when inflation rose and the economy overheated, the Fed rapidly raised interest rates multiple times without hesitation. Governor Pan's clear statement that further interest rate or reserve requirement cuts could be made if necessary is very encouraging! It sends a strong signal to operators in the real economy: if downward pressure on the economy does not ease, the People's Bank of China will not stand idly by and will continue to take proactive and effective measures to restore the vitality of the real estate sector, the capital market, and the economy!
In this round of policies released by the central bank, the most exciting aspect for the capital market, which ignited the subsequent A-share rally, was the introduction of two new policy tools specifically designed to invigorate the capital market. One was the establishment of a 500 billion yuan swap facility for securities, funds, and insurance companies, enhancing institutions' ability to access funds and increase their stock holdings. The other was a 300 billion yuan special refinancing loan for stock buybacks, guiding banks to provide loans to listed companies and major shareholders to support stock repurchases and increases.This exceeded market expectations significantly.
Even more surprising for investors was Governor Pan's additional comment at the press conference that if the initial 500 billion and 300 billion were fully utilized and effective, there could be subsequent rounds of 500 billion and 300 billion yuan. This statement conveyed an unprecedented level of commitment to policy support for the capital market. If necessary, the central bank would continue to provide ample liquidity support for the capital market! All of this far exceeded expectations and was unprecedented. With Governor Pan's new tools and supportive statements, investor confidence in the capital market quickly returned!
Why was it that in the first eight months, despite the Central Huijin Investment and various national financial institutions purchasing over a trillion yuan in ETFs, the market still could not stabilize and boost investor confidence? This time, with the 800 billion yuan new tools not yet spending a single penny, the market recovered the losses of eight and a half months in just five days. The difference lies in the fact that previously only money was provided without confidence, while this time the focus was on instilling confidence; perhaps the money didn't even need to be spent for the stock market to surge!（ Alternatively, it could be that they aimed to provide confidence before but failed to hit the key points, with insufficient strength and attitude.）
Investor confidence in the capital market often comes from the central bank rather than the securities regulatory commission. Who knows the name of the chairperson of the U.S. Securities and Exchange Commission? (At least, I really don't know who it is.) However, investors around the world pay close attention to anything the chair of the Federal Reserve says in any context. As long as the market believes that the central bank is starting to do the right things, investor confidence will recover and strengthen. Investor confidence is more about whether the central bank is doing the right things and whether the measures are sufficient. Recently, although the renminbi has experienced interest rate cuts and reserve requirement reductions, beginning a phase of monetary easing, the renminbi exchange rate has started to strengthen. This indicates that global investors recognize that the Chinese central bank is taking the right actions, and foreign capital is beginning to pay attention to the Chinese economy and capital market again. From the perspective of exchange rates and capital flows, there are signs that foreign capital, which once left, is starting to return. In other words, confidence is beginning to come back. The capital market is not only a barometer of the economy but also a barometer of confidence.
How should we look at the new policies and its changes?
On September 26, the Politburo held a meeting to analyze the current economic situation and economic work. Many friends have likely studied the announcement of the meeting carefully. However, the very fact that the meeting was convened conveys rich and strong signals. According to experts' interpretations, it is customary not to discuss economic work in September, so this impromptu meeting itself conveys a sense of urgency and change, indicating the pressing need to introduce incremental policies. The meeting outlined six requirements:
1. Enhance the sense of responsibility and urgency in economic work.
2. Increase counter-cyclical adjustments in fiscal and monetary policy.
3. Promote the stabilization and recovery of the real estate market.
4. Focus on employment support in social welfare.
5. Strengthen efforts to attract and stabilize foreign investment, as actual foreign investment in China decreased by 31.5% year-on-year from January to August 2024.
6. Strive to boost the capital market and actively guide long-term funds into the market.
From our grassroots research on domestic consumption data and the profits of large-scale enterprises in August, it is evident that the pressure on the economy is indeed increasing recently. Perhaps these various factors have contributed to the new policy changes. From the meeting announcement, it is clear that the central government has given significant attention to the current issue of insufficient domestic demand, and there is a high level of consensus on the strategic importance of stabilizing and recovering the real estate and capital markets. According to the information conveyed in the press conference on the 24th by the "One Bank, One Bureau, One Commission," the intensity of the monetary and stock market policies this time is being implemented with full throttle.
The current suspense remains regarding how strong the fiscal policy will be. This will likely require further analysis after the National Day holiday once the specific policies are implemented. However, from the sense of urgency expressed in the Politburo meeting, market expectations have generally been raised. I believe that while the magnitude of the first batch of fiscal policies is important, what matters more is the sufficient attention and determination to implement them. If the first batch of policies does not yield enough results, there can always be a second or third batch. This is similar to the Federal Reserve after 2008, when Bernanke introduced quantitative easing and subsequently went through rounds of escalation until the U.S. economy emerged from the trap of balance sheet deflation.
This shift may be the significant policy turnaround that everyone has been anticipating, marking a return to prioritizing economic growth and signifying a transition from "painful deleveraging" to "joyful deleveraging" (for readers interested in Ray Dalio's theory on deleveraging in two stages, you can refer to the discussion in his second book, "The Debt Crisis").
What kind of Rebound is this? Or is it a Reversal?
When the bear market sentiment swings pessimistically downwards, it eventually swings back up into a reasonable range during a bull market euphoria. These are inherent rules of the stock market. In recent trading days, the rapid rise of the stock market has led many "rational" investors to feel that the market is too crazy to sustain. Those who missed out find it hard to enter and hope the market will cool down, providing a comfortable opportunity to get in. These are all beautiful wishes, but experience tells us that they are very difficult to realize.
Jack Ma once said, "Some people see because they believe. Others believe because they see." In the capital market, there is a third type of person: "Even when they see, they do not believe." In recent months, some self-media articles have been spreading pessimistic views on the medium-to-long-term prospects of the Chinese economy, and the sentiment in the capital market has exhibited characteristics of "suffocation and despair." I repeatedly ask myself and my team one question: Do you believe that China's capital market will still have cyclical patterns in the future? Will there still be bull markets? I choose to believe! I believe that hardworking and kind-hearted Chinese people will surely usher in a turnaround in the economic cycle. I believe that there remains cyclical potential in China's capital market. When the ice and snow melt away, the next bull market will surely arrive!
If last month we were still saying that, according to the standards for worthy investments, the number of good companies to invest in was increasing, but the moment to go all in might still require waiting, what exactly are we waiting for? The policies and statements from the central bank on September 24 and the declarations from the Politburo on September 26 announcing a significant policy shift are precisely the clarion call we have been eagerly awaiting!
This round of market activity is significant; it is a reversal rather than a mere rebound!
As for whether we can consider this a bull market (since there is no unified standard for defining a bull market—some define it by reaching historic highs, while abroad it is generally considered a rise of at least 20%), from the perspective of profit-making effects, calling this round of market activity a bull market is not unreasonable. Considering the new rules of the stock market in the era of instant information, the rhythm and dynamics of this bull market will be quite different from past ones. If there is a continued sharp rise after the holiday, the duration of the rally may be difficult to sustain, and the volatility could be significant, making it challenging for amateur investors to navigate.
The future duration and scope of the market's performance will be closely related to the strength and determination of upcoming fiscal policies. However, the continuous warming of the capital market itself is an important lever for proactive fiscal policy! Providing cash subsidies of three to five trillion yuan is far less effective than the clear leverage effect brought about by a 50% rise in stock prices, which enhances the wealth effect of stock and fund investments. Currently, the situation appears to be moving in a correct and positive direction.
Recent Strategy: Don’t become “Yegong”
How should we view the recent "irrational" surge? This is a scene we've experienced multiple times before. Looking back at my past articles, the last time I used the phrase "do not be like Ye Gong who loved dragons" was ten years ago. On November 29, 2014, the title of that issue of WE THINK was "Do Not Be Like Ye Gong Who Loved Dragons.": a story that tales about Yegong who loved dragons and always dreamed of what a dragon would look like, but ending up being frightened when a real dragon showed in front of him but didn’t match his imaginations. At that time, we also faced a short-term surge in the stock market, with increasing trading volumes, and the market characteristics were quite similar.
In reflecting on the lessons from the first round of the bull market, one of my takeaways was to avoid being like Ye Gong! In a bear market, we pray every day for the bull market to arrive, but when the bull stands before us, we get scared off by its massive size and speed! Is a big bull not a bull? Is a fast bull not a bull? Ye Gong was frightened away by the real dragon because the dragon he imagined in his mind was different from the one before his eyes. For investors who have been accustomed to a bear market environment and mindset for a long time, and who have longed for the bull market yet have never seen this "true bull," the situation is no different.
The sudden policy shift and the need for global capital to quickly adjust from severely underweighting Chinese assets are key reasons for the recent market explosion. With many in the market already facing significant losses, who would be willing to sell at a loss? This is likely the main reason behind the recent market rally!
Before the holiday, we had already increased our positions to an actively aggressive level, and we will continue to maintain a high-position offensive strategy at this stage. Structurally, we have shifted from an emphasis on value to a more balanced approach between growth and value, prioritizing growth.
The above is a brief report and discussion on our recent policy and market changes, as well as our investment strategy. We also want to emphasize that all predictions are merely forecasts. As a fund manager, it's like being a driver; we will closely monitor further changes in policy and the environment, making timely adjustments as we deem appropriate.
Happy 75th National Holiday!
Wu Weizhi
Oct 2nd 2024
本期《偉志思考》簡體中文版鏈接：
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