Will China's stimulus measures be enough to ignite a lasting economic recovery?

The Chinese stock market has had a tough few years, but suddenly things are looking up after it posted the biggest weekly gain since 2008, following new stimulus measures announced by Beijing.

The Shanghai Composite Index closed last Friday almost 10 per cent higher and China’s CSI 300 climbed 15.7 per cent, while the Hong Kong Hang Seng's 13 per cent gain was its best weekly return since 1998. On Monday, Chinese stocks recorded their biggest single-day gains in 16 years.

China’s stimulus package exceeded expectations as the People's Bank of China cut interest rates, reduced banking reserve requirements and took steps to reduce mortgage costs.

Paul Diggle, chief economist at fund manager Abrdn, calls it a “game changer” that should boost growth and improve risk sentiment towards China, while noting that the country’s economy still faces “structural challenges”.

Beijing’s shot of stimulus is great news for investors, not just for those holding exchange-traded funds (ETFs) tracking China, Hong Kong and emerging markets.

The shot was heard around the world as a host of US, UK and European stocks that sell their goods into the world's second biggest economy also jumped.

That could be an exciting opportunity for investors who like buying undervalued companies in out-of-favour sectors just before they return to fashion. So, is the Chinese recovery built to last?

It has been a tough few years for China since the pandemic. The China MSCI index fell 21.72 per cent in 2021, 21.93 per cent in 2022 and another 11.20 per cent last year.

The index edged up 4.39 per cent in the eight months to August 31 this year, but the real action came in September.

Charu Chanana, head of FX Strategy at Saxo Bank, says Beijing's stimulus will bolster investor and consumer confidence but cautions that China still faces challenges such as “high debt, deflationary pressures and demographic issues”.

“More aggressive reforms and a broader strategy may be necessary to fully revitalise the economy.”

She names five investment sectors that could rally nicely if the recovery continues. “Luxury goods, mining and energy, automotive, technology and construction.”

Mohamed Hashad, chief market strategist at Noor Capital, says the big question is whether Beijing’s stimulus measures will be enough to spark a sustained economic resurgence.

“Critics say previous efforts may have fallen short, but the scale and scope of the current package could yield better results.”

This could create a ripple effect across global markets and provide a much-needed boost to global economic growth.

European luxury goods makers such as LVMH Moët Hennessy Louis Vuitton and Kering will benefit from renewed confidence among Chinese middle-class consumers.

“LVMH, the world’s largest luxury goods conglomerate, and Kering, which owns Gucci and Yves Saint Laurent, both saw sales in China rise by double digits in the first half of the year,” Mr Hashad says.

Last week they went ballistic. Shares in LVMH jumped 19.22 per cent in just five days while Kering soared 20.86 per cent. Swiss luxury goods specialist Richemont climbed 18.22 per cent.

British luxury brand Burberry has crashed harder than any FTSE 100 stock over the last year with falling Chinese consumption largely (although not wholly) to blame. Its shares jumped 18.31 per cent over the past week but are still down 62.55 per cent over 12 months.

Burberry shares may look cheap, but the board has axed its dividend and still has a big job fighting back. As ever with apparent bargains, investors should tread carefully.

For years, booming China has consumed about 60 per cent of the world’s metals and minerals production, so nobody was surprised when global mining giants also flew last week.

London-listed Glencore, Anglo American, Antofagasta and Rio Tinto all did well, as did Swedish miner Boliden and Australian giant BHP, says Russ Mould, investment director at AJ Bell.

Again, there's a similar pattern here, with Glencore jumping 12.72 per cent last week, but it's still down 7.98 per cent over one year.

Mr Mould says it helped that China announced stimulus one week after the US Federal Reserve cut interest rates for the first time in more than four years. “This allows China to cut rates, too, and without driving down the value of the renminbi.”

He says markets think this is just the start of Chinese stimulus. “Given beaten down sentiment towards Chinese and Hong Kong assets, the picture may soon look a lot brighter.”

Other FTSE 100 companies should benefit from the Chinese resurgence, including spirits giant Diageo, and Asia-focused financial services companies Prudential, HSBC and Standard Chartered, Mr Mould says. “Standard Chartered has great potential, as its shares continue to trade at a sizeable discount to net asset value.”

A Chinese rebound could also revive ailing Western car manufacturers such as German giant Volkswagen, which recently threatened up to 30,000 job losses as sales stall.

Mr Hashad says it could benefit from China’s electric vehicle (EV) drive. “Volkswagen has committed to investing €15 billion [$16.7 billion] in China by 2025 to expand its EV line-up and production capacity.”

The Volkswagen share price also jumped last week, by 6.84 per cent, with another potential China beneficiary, Elon Musk’s Tesla, climbing 7.4 per cent.

Tesla has huge exposure to the country and recently started to build a $200 million factory in Shanghai to make its Megapack energy storage batteries, the first Tesla battery plant outside the US.

Companies continue to see China as a hugely attractive market, despite political tensions with the West, says Tony Hallside, chief executive of brokers STP Partners in Dubai.

“Apple is looking to expand its research and development in Shenzhen and Shanghai, while Bosch’s investment in new energy vehicle components further showcases China’s pull for tech-driven innovation.”

Mr Hallside says despite “friction” with the West, China is hard to ignore. “That said, companies must balance the potential for trade restrictions or regulatory shifts against potential growth opportunities.”

Technology is a huge opportunity for investors, despite fears that the so-called “Magnificent Seven” US tech stocks are now expensive, says Mr Hashad.

“Nvidia chip maker and Netherlands-based semiconductor specialist ASML should also enjoy a boost, as should Apple.”

Jason Hollands, managing director of Bestinvest by Evelyn Partners, highlights a string of businesses with large exposure to China, including US-listed technology firm Corning and specialist chemicals firm Albemarle.

“European names with high China exposure include Rio Tinto, Volkswagen, Richemont, Adidas, L’Oréal and Burberry.”

Yet investors should tread carefully as US presidential elections loom on November 5. “If Donald Trump returns to the White House, trade wars will be back on the table, as he has threatened to slap a 60 per cent tariff on Chinese imports.”

Trade wars hurt both sides, Mr Hollands says. “The US is China’s single biggest export market, but tariffs would backfire on the US, proving inflationary for domestic consumers who will ultimately bear the cost.”

He says the recent stimulus is far from the “big bazooka” China needs to really get its economy flying, but it may have sounded the start of recovery. There are risks, but the potential rewards are huge, too.