First it was the economic reopening, then the restructuring of the economy, now it's 'just because'.

Time for China's stock market to finally rally?

That's the pitch 👇

FINALLY. The logic is always the same. Chinese stocks are cheap on a relative value basis so it's time to buy.

And, there are very subtle signs that China's leadership want people to buy stocks...

The bear case is well known. Earlier today, Bernstein downgraded Alibaba to market perform and lowered their price target from $130 to $98.

Alibaba: Hope as a thesis - Downgrading to Market-Perform
The set-up doesn't get much easier than this. We upgraded Alibaba a year ago on the basis that the stock had discounted perpetual low growth, and that reopening would help support growth via better category mix.
Alibaba's shares have traded in a range since — but while they remain cheaply valued, perpetual low growth no longer feels like an aggressive bear case.
Alibaba GMV growth will show improvement in the June quarter, meanwhile merchant feedback has continued to point to anaemic marketing spend intentions.
Quarterly comps get harder from here, which we worry contributes to value trap risk.

Based on current trends, perpetual low growth is absolutely the base (not bear) case. The bigger question is if those trends will continue.

This is nothing new. China's domestic demand problem was nailed on as soon as Xi first uttered the immortal line 👇

Houses are for living in, not for speculation

The housing market was the economy until that point. It took time for the message to get through, but in the end it did...

We wrote about the likely fallout back in 2021 👇

Does nobody Xi the real risk?
About China, not Evergrande... 👇 Falling property values don’t square with Xi’s grand plan to boost middle-class consumers…
A depressed Chinese consumer is a very real possibility. And it's one that I think markets will increasingly start to discount once the 'excitement' of Evergrande fades and the layers are peeled away...

Covid made the domestic demand/consumption problem worse, and policymakers have recognised the issue for some time now.

At the end of 2022, this was the message...

“We must unswervingly implement the strategy of expanding domestic demand to effectively deal with external risks and challenges with the stable development of ourselves, as we face a complex and grave foreign environment,”

It's not gone well so far. All talk and no action. Earlier today 👇

China will take steps to boost demand, accelerate green transition - Premier Li
Chinese Premier Li Qiang on Tuesday said China will take steps to boost demand, invigorate markets, promote development while accelerating the green transition and opening “high level” parts of its economy to the outside world.

However, think tanks and economists are now talking up the potential of consumption vouchers to boost demand.

Gao Ruidong, chief macroeconomist at Everbright Securities 👇

"Since the employment situation among young people remains severe and the willingness of spending among households remains unstable, the consumption sector may see an uneven recovery this year,"
"We believe that a large-scale issuance of consumption vouchers is feasible to quickly drive growth."
He suggested that consumption vouchers worth 300 billion yuan be distributed to households.
"Such an amount of vouchers will generate an additional 1 trillion yuan in consumption, contributing to a 0.62 percentage point increase in GDP growth,"

Liu Xiaoguang, a Renmin University professor and co-author of the think tank’s midyear research report says go big or go home babay!

China should consider issuing 1.5 trillion yuan (roughly $208 billion USD) annually in special treasury bonds in the form of digital yuan to extend around 1,000 yuan in subsidies to each person in the country
“It’s the most effective way to increase the proportion of household disposable revenue [in the national total income] and improve income distribution,”
“Also, it can help boost the development of the digital yuan.”

Everyone else did it during the pandemic - why wouldn't China follow suit?

An End To Yuan Weakness?

What started out as a pure yield differential play back in 2022... 👇

Weaker Yuan Ahead, 263 Rate Hikes & Apple Vs Netflix
China’s Weakening Yuan | 263 Rate Hikes | Apple vs Netflix
Analysts are the Mrs Doyle's who've been asking if China will allow the Yuan to weaken for ages. Now it's starting, everyone's gone quiet...

Has propelled yuan depreciation to extremes. It looks like the pain point has been reached for now...

While it remains to be seen if China's economy can really turn the corner, the stage is set for yet another hope-fuelled rally.

July's politburo meeting could provide some shock and awe stimulus policies, and US treasury secretary Yellen's set to travel to China around the same time, potentially building on Blinken's recent visit.

US Treasury Secretary Janet Yellen plans to visit Beijing in early July for the first high-level economic talks with her new Chinese counterpart, people familiar with the scheduling said.
Her trip was long anticipated but was put off until “the appropriate time,” Yellen said in April. The people discussed the timing and purpose of the trip on condition of anonymity, because the details haven’t been officially announced.

Summing up, a Politburo meeting that could positively surprise on the demand/stimulus front around the same time as US & China treasury officials get together, plus underallocated institutional investors is fertile ground for some good old-fashioned FOMO...

GS: unless exogenous shocks arise that fundamentally derail our investment case for China, we see rather limited downside from current levels and believe the risk of engaging with China now is asymmetrically skewed to the upside.
Macrodesiac: Just don't overstay your welcome