Investors are sceptical about China's anti price war rally

Fund manager Yang Tingwu reaped his profits quickly after a furious rally in Chinese stocks of steel and cement, spurred on by Beijing's anti-price war and excessive industrial production campaign.

Yang, along with many other investors does not think China's ambitious plan of pulling producers out from a spiraling deflation will succeed.

It is difficult to reduce excess capacity because "closing factories hits local tax revenue, employment and GDP", said Yang, vice general manager of Tongheng Investment.

The property market crisis, coupled with the trade war, has led to a "short-lived price recovery" on the demand side.

Profit-takers such as Yang could kill a burgeoning upturn in Chinese industrial shares and commodities, which was triggered last month by President Xi Jinping’s call for regulating disorderly or "involution" competition.

The index that tracks Chinese steelmakers grew by 16% last July, but since then has slowed down. Cement producers' shares soared 23% in July, but are now reversing their gains. The share price rally in the coal, solar, and electric vehicle sectors has also slowed.

This snapback shows that investors are not confident in Beijing's promise to reduce industrial overcapacity. If there is any effect, it will be subdued by the most severe consumer slowdown since years, and the largest global trade ructions for decades.

Analysts have drawn parallels to China's 2016 supply-side reforms, which fueled a two-year upward trend in the stock markets. The situation was vastly different back then. Local households were less indebted, more confident and there was a flourishing property market.

Yuan Yuwei is the hedge fund manager of Water Wisdom Asset Management. He said that recent rallies were driven by "animal spirit" or pure investor emotions.

Yuan replied, "This time it's different."

Alexis De Mones is a portfolio manager for the Ashmore Group in London. He said that much depends on the implementation of the policy and whether or not it impacts overall output, or helps reduce disinflationary forces.

"Is this a positive?" It could be a positive for the stock exchange if profits are growing. "I think the impact of anti-involution is still very ambiguous," he said.

FRAGILE CONFIDENCE

The lack of confidence in the policy has led to a decline in local commodities like coal, glass and steel wired rod.

"Polysilicon price jumped, then dropped back. Prices of coal jumped, then dropped. Why? William Xin of Spring Mountain Pu Jiang Investment Management said, "There's a severe lack of demand."

It's a quick opportunity to trade.

Some analysts, however, are more optimistic and see beyond the next few days or weeks.

After 33 months of deflation at the factory gate, they expect concrete steps to be taken by China to stop price cuts.

Standard Chartered stated in a report that "reflation has gained prominence on the policy agenda with the goal of breaking the downward spiral of prices and weaker consumer demand."

The recent calls to rectify disorderly competitiveness "will likely be followed by further supply-side action."

JPMorgan analysts also shared this view, and they expect concerted effort in China to return investment returns and pricing to normal.

In a recent report, a team of equity analysts led by Wendy Liu stated that sectors with losses such as solar and lithium will "see fixes" and may "see a general rally."

According to the experts, consolidation in other industries such as coal or battery could lead to a gain of market share for leading players.

We see anti-involution trade as a 18-month business.

(source: Reuters)