Chinese stocks rally. But there’s still a big risk — especially in real estate.

But China needs to do more to make the gains sustainable, analysts say.

Gavecal China Economist Wei writes that calls from Chinese authorities for a more precise adjustment of macroeconomic policies do not equate to the decisive intervention that investors have been waiting for.

HSBC analysts had a similar reading: Despite Beijing’s more targeted support for the economy, the data still suggest there is nothing to encourage a “big bang” to bolster growth in the near future.

“We’re not at the point where it’s going to take a while, but it’s clear that the rate of economic stimulus is increasing. Mendy Zhang, Asia Pacific Franchise Strategy Analyst at Asset Manager Ninety One, said the longer the weak economic data continues, the more stimulus measures we will see.
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he said.

And analysts note that instead of building on economic progress for a strong recovery, Beijing has focused on stabilizing the economy by grappling with structural challenges such as debt mountains with local governments. The officials stressed that the post-Covid recovery could come in waves.

The Politburo asked the authorities to find ways to subsidize the consumption of electronics, home appliances and cars. For example, Beijing is offering tax breaks for electric vehicles until 2027.

They reiterated their support for private sector development amid growing concerns over recent business activities, including internet giants such as Alibaba Group.

(BABA)

Analysts are still concerned. He pointed out that the labor market was weak in the second quarter and that Chinese households were still clinging to savings. “If the job recovery is interrupted, there is a clear risk that income and consumption growth will weaken,” he said.

And the elephant in the room, so to speak, is China’s still-struggling property market — a longtime engine of economic growth. Authorities have moved aggressively against what they see as a speculative debt-inflated bubble in the property market. The restrictions on use have caused problems among indebted developers and shaken the real estate market.

The Politburo did not repeat the common slogan encouraging the invasion of “housing is not for speculating but for living” in the sector, but they did not take steps to reverse the situation and build confidence among prospective home buyers.

As property demand slows, local governments can relax property policy further without feeding another property bubble, he said. Beijing is encouraging the construction of subsidized housing and calls for the renovation of “urban villages” in large cities. That should boost construction activity, but it won’t see the property market spurring sales.

Some of these efforts, as well as infrastructure investment, should help boost growth in the second half of the year. The International Monetary Fund revised its April forecast to 5.2% this year and 4.5% next year, although it raised concerns about China’s economic recovery.

Some strategists see a relatively benign outlook for Chinese stocks. Gavecal CEO Louis-Vincent Gave said BaronChinese stocks are likely to do well in the near term as investors are confident that China’s economy is not collapsing and Beijing is injecting more liquidity into the market.

In the long term, however, Gave sees economic problems. Last fall, Chinese authorities relied on assets to jump-start the recovery, but this time their efforts are not working in the same way. For example, property developers are opting to use any stimulus to reduce their debt and buy bonds instead of buying more land, Gave said.

Broadly speaking, according to Gav, “animal spirits in China” have been destroyed among entrepreneurs. “I don’t see a ton of capital spending, new real estate development or infrastructure spending,” Gave said.

For households to feel better about buying property, analysts say a more significant change in policy is needed. And so far, that has yet to come.

Write to Reshma Kapadia at reshma.kapadia@barrons.com