China’s deleveraging campaign is completely misguided and could constrain corporate profitability, says Canadian research firm

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by Yulu Ao at

China’s corporate earnings have run below potential in the past decade due to a deleveraging campaign by authorities who believe excess stimulus promoted indebtedness and barring a reflationary push, bonds will continue to outperform stocks, a Canada-based global investment research firm said in a report.

“There is no question that Chinese equities are cheap, but over-saving, excessively tight monetary conditions and weak pricing power have and will continue to weigh on corporate profits,” the report from Alpine Macro said. “More worryingly, the secular pattern of the Chinese equity market resembles that of the Japanese equity market after the 1989 crash.”

It also warned that the economy runs the risk of Japanisation – a term that describes Japan’s two-decade battle against deflation and stagnant growth.

The Hang Seng Index has lost 7.1 per cent this quarter, while the CSI 300 Index of onshore stocks has fallen 10.2 per cent, according to Bloomberg data, making them the worst performers among stock benchmarks globally.

In this context, the Alpine Macro analysts said Chinese stocks could bounce after an underperforming streak since 2021 and that a sustainable rally would first require aggressive pro-cyclical fiscal policy and persistent monetary stimulus, both of which are possible but unlikely.

This is in light of the post-global financial crisis policy stimulus being blamed for the build-up of leverage that created economic and financial fragility, the report said.

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