Investors Hoping for a Massive Reflation Are Going to Be Disappointed, Says Tian Yang

FS Insider recently spoke with Variant Perception’s Tian Yang on whether China's recent stimulus measures will help to stabilize economic growth (see Leading Indicators and Liquidity Declining, Says Variant Perception’s Tian Yang).

China's Shanghai Index is up 25 percent year-to-date and investors are hopeful for more growth based on recent stimulus measures by the Chinese government. What is your outlook?

"Overall, I think the market is front running the policy easing a little bit. I think the hope with the China rebound is that we get a 2016-style massive reflation where they open the taps, liquidity floods into the system and they do a lot of easing on the fiscal side as well. You get infrastructure investment and then that drives a global risk rally or reflation trade. What we're seeing today is not quite that. The government is making a lot of noise and they seem very serious about taking action to support growth but on the liquidity side, things are actually a lot tighter than before... When you look at the balance sheet of non-bank financial institutions in China, it’s still actually contracting, it's just the pace of contraction has slowed down a lot... I think because the policy objectives from the government are slightly different this time, investors are probably going to be disappointed by the magnitude of the reflation that’s going to happen..."

china manufacturing
Source: Bloomberg, Financial Sense Wealth Management

In that case, would you say you are neutral or bearish on China?

"In terms of stance, I tend to think about three main components. First, the macro component we talked about which right now is somewhat neutral. The second component would be market dynamics and seeing whether China is oversold or overbought, these kind of momentum metrics. The third component would be valuations—ultimately what is the expected return? And when you look across these components, overall, are things in China cheap? It's not as cheap as before the rally, but they're not too expensive. If you look at the market dynamics, I think it's getting a bit more overbought than oversold now and the macro is kind of somewhere in the middle. When you net all that out, a neutral stance is probably more warranted."

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