China stocks could bounce, but strategists say it probably won't last

Published Fri, Dec 31 20217:06 AM ESTUpdated Sat, Jan 1 20229:22 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Chinese stocks bounced hard Thursday and could continue to gain in the new year. But strategists say this may just be a short-term trading opportunity and investors should remain skeptical about the group. On Thursday, Baidu , Alibaba , JinkoSolar , Vipshop and others all jumped sharply after a week of declines, and some strategists see more gains in store. The KraneShares CSI China Internet ETF (KWEB) rose 8.9% on the session, after being down nearly 12% for the first three days of the week. For the year, the ETF is off 52%, as of Thursday's close. "Chinese stocks are generally out of favor and there is always the risk of catching a falling knife as they could decline further," wrote Jimmy Chang, chief investment officer at Rockefeller Global Family Office. "However, I think one can start accumulating stocks of the leading companies if one has a multi-month horizon for a tradable rally." China's crackdown on internet and other companies this year drove Chinese companies' shares down by double digits. But Chang lists the following reasons for a temporary rebound: "Sentiment is very negative and year-end 2021 tax loss selling would be done once the calendar turns to 2022." "Fundamentally, the Chinese government will need to stabilize the economy to avoid social issues. Chairman Xi Jinping is vying for an unprecedented third-term which is to be ratified at the Party Congress in late 2022. I think he would prefer to prop up the economy to avoid being challenged by other competing factions in the party." "President Biden may roll back some of the tariffs, which could temporarily de-escalate the tension." Chang warns that companies and investors in the Chinese stocks will be subject to the evolving policy of the Chinese Communist Party, which could become more hardline. "They're doing some things around the edges to soften the blow to their economy from the measures they took," said Sameer Samana, senior global market strategist, Wells Fargo Investment Institute. "We would be a little cautious. We think in some ways they really kind of mean it this time when they say they're not going to come in guns blazing with stimulus." "We would not rule out a bounce, but we don't think it is sustainable. We downgraded emerging market equities, and China is the biggest weighting," Samana added. Samana said the government's more populist turn means companies will continue to be at risk. As China's leadership this past year emphasized a more "common prosperity," it reined in internet companies, education companies and offshore IPOs and banned cryptocurrencies. "When you kind of switched to the more populist side of things, especially when you have a system like China where they can dictate things, it tends to be more individual- or worker-friendly and less corporation-friendly, and that comes at the expense of shareholders who have already felt a lot of pain this year," he said. Ethan Harris, global head of economics research at Bank of America Merrill Lynch, said investors have to look at China differently from the way they had in the past. "The Chinese economy itself is likely to pick up as they do some more easing measures. But we think the economy in China is going to be much weaker than many forecasters think. [Xi is] reasserting China's Communist Party control of the economy," said Harris. "We have China growth the same as the U.S. next year, 4%, which is a great number for the U.S. and a disappointment for China." Harris said China could be in a permanent process of downshifting its growth rate, after relying on private-sector growth. "This is the first time in my experience China isn't following the standard playbook, where they pour stimulus on the economy," he said. "This time they've been sitting on their hands. Clearly something is different here. They're changing their priorities. It's no longer growth at all costs."

Chinese stocks bounced hard Thursday and could continue to gain in the new year.

But strategists say this may just be a short-term trading opportunity and investors should remain skeptical about the group.