Another false dawn for Chinese stocks

Capital Economics nicely sums up the MB view of China today:

Equities in China have soared in recent days as sentiment about the economy’s prospects has warmed. But we do not expect the rally to be sustained.The Shanghai Composite has risen to its highest level since December. Equity prices have also risen strongly in Hong Kong. Both markets have significantly outperformed others in the region over the past few weeks although, in China’s case, the performance over a longer horizon is much less impressive.

The rebound in Shanghai has been broad-based with the strongest gains in financial and property stocks. The turnaround is linked to waning fears of a hard landing and expectations that China’s economic growth is now picking up. At the same time, many local governments have been loosening property market controls.

We suspect this equity rally will prove to be short-lived. Fears of a hard landing always looked overdone, but the structural headwinds to China’s growth are real. We expect the ongoing economic rebound to peter out before the end of the year. In particular, we do not believe that policymakers will allow the wholesale relaxation of property market controls that many are hoping for. Targeted support measures have already stabilised GDP growth and, with employment still healthy, there is no need for further stimulus. We expect policymakers to focus increasingly on structural reform in coming quarters, with oversupply in the housing market a major ongoing concern.

I’ve noted for weeks that the Chinese stock market bounce has been driving the out-performance of iron ore miners. If the rally sputters so too will the locals…