panda bearishness should counter any buy signal

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

President Xi Jinping plans to renew China’s “panda diplomacy” with the US. He has promised new pandas for American zoos. These cuddly looking bears may appear to soothe Sino-US foreign relations. But that will not help investors fretting over Chinese stocks trading at historically low valuations.

Biden said the meeting with Xi in the US yielded progress. Xi claims China is ready to be a partner and friend of the US. They agreed to resume military communications after several years of tension over a possible Taiwan conflict.

Markets should focus on what was left unsaid. There was no discussion on US curbs on advanced chip sales, US investments in Chinese technology and the disputed areas of the South China Sea. Last month, the US further tightened a sweeping set of chip export controls implemented in 2022. In August, Washington said it would limit US investments in advanced Chinese technology. 

Worse, in response to a question at his post-summit press conference, Biden referred to Xi as a “dictator”. This sparked an angry response from the Chinese foreign ministry on Thursday, inflaming existing tensions.

Gains in Hong Kong and mainland listed Chinese stocks in the lead up to the summit anticipated an improvement in US-China relations. That now looks overly optimistic. Chinese stocks were among the worst performing in Asia on Thursday, led by tech and electronics stocks including Lenovo, Alibaba and Xiaomi. The latter fell 7 per cent.

All this comes when Chinese stocks look historically cheap. Shanghai’s Composite Stock Index trades at just 1.2 times its estimated book value. That is a discount to most of its regional peers and near the bottom of its 10-year range. The same holds true for the index’s forward price/earnings ratio at under 10 times.

But the market is cheap for a reason. Bottom-fishing investors seeking bargains worry most about the local property sector. On Thursday, October data on home prices fell the most in eight years. The real estate crisis is getting worse, confirming that Beijing’s monetary easing measures have little power to improve the situation. Real estate shares, even those of the safest developers such as China Vanke, have plummeted in recent weeks.

The recent rally in Chinese shares should falter. No number of cute pandas can offset the asset deflation threatening the property sector.