Cause to buy, cause to sell China’s new bull market

As Beijing’s stimulus blitz sends China stocks skyrocketing, count economist Stephen Jen among the bulls who think China’s biggest rally since 2008 is just getting started.

“Chinese equities are extremely undervalued,” says Jen, the chief executive officer of Eurizon SLJ. Because “investors are so underweight everything Chinese,” he notes, “a serious rally is entirely possible.”

China’s bold moves last week to slash interest rates, lower mortgage rates, relax rules for homebuyers in major cities, reduce the amount of cash banks must keep in reserve – and telegraphed moves of stimulus to come – sent Chinese shares soaring for a ninth straight day on Monday (September 30).

Today’s surge by as much as 9.1% in the benchmark CSI 300 Index is the biggest since 2015, a year drenched in significance for President Xi Jinping’s government. That was when plunging Shanghai stocks lost a third of their value in just three weeks from July to August 2015.

Fast-forward to the present, the People’s Bank of China’s (PBOC) actions, coupled with the US Federal Reserve’s big easing and falling global oil prices, mean China’s risk assets “ought to do very well,” Jen says. “After the US election, I expect global equities to rally powerfully into year-end,” he adds.

Not so fast, warns Stephen Roach, former Asia-region chairman for Morgan Stanley. “With the Politburo sending an emergency meeting message of more to come,” economist Roach asks, “Is China’s long economic nightmare now over? If it were only that easy.”

Roach remains “increasingly concerned that China was at risk of falling into a Japanese-like quagmire – a balance sheet recession characterized by stagnation and deflation as an outgrowth of the bursting of a major debt-fueled asset