Bloomberg has published a piece this week highlighting a Chinese Hedge Fund betting big on a Chinese stocks rebound. The Fund is called Guangdong Zhengyuan Private Fund Investment Management Co. and it has an impressive track record, The fund is up around 3000% over the last five years and the fund is now hyper bullish on Chinese stocks.

The rationale

The thinking behind the move is that with all the bad news in markets central banks are more likely to hold back from very aggressive monetary policy moves. The Russia/Ukraine conflict, Fed hiking rates, and China economic strains all mean that there should be a pointy coming where central banks try to support economies again.

The rationale unpacked

This does make sense, especially with the perspective that China’s Gov’t has given markets in recently reassuring them that they would ensure stability in the stock markets. Furthermore, expectations are that the People’s Bank of China could cut rates sometime soon in order to support markets. They could also reduce the reserve ratio requirement for banks to allow more lending. So, the situation in China is fundamentally different to the US and Europe. Those central banks are on a rate hiking cycle. Also, China’s A50 index is now down 40% from last year’s high.

The risks

There are two key risks to this outlook.

  1. Firstly, the Russia/Ukraine crisis spills over onto China’s lap. China and Russia are not official allies, but China is supportive of Russia and there is a potential risk that geopolitics will result in China becoming isolated due to supporting China. This situation is not at hand, but it is a geopolitical risk that needs to be considered as it could weigh on Chinese stocks.
  2. Secondly, China takes an even larger move away from Western Capitalism. At the last Communist Party meeting, there was a move from China’s central Gov’t to redistribute wealth.