China has been trying to get back into the good graces of investors this week with vague but rare reassurances about more market-friendly policies and efforts to revive the economy. He acknowledged that his crackdown on internet and real estate stocks may have gone too far and vowed to reduce the cost of Covid restrictions.
Wide-ranging promises have struck the right chord to mend investor sentiment, but a lasting recovery from China’s painful course and economic crisis will require Beijing to carry out actions that match its words.
On Wednesday, the reading of a special meeting of policy makers led by China’s top economic official Liu He included votes for more market-friendly policies and proactive measures to support the economy. Government officials also left the impression that the Internet industry crackdown was winding down and implementation would be clearer, addressing one of investors’ biggest fears.
In a nod to the panic that followed last week when the Securities and Exchange Commission began identifying Chinese companies at risk of delisting, policymakers said they support overseas listings and cryptically claimed that authorities Chinese regulators were making progress on a cooperation plan with the United States to avoid delisting.
On Thursday, Beijing turned its attention to concerns that China’s stiff Covid restrictions would take a painful toll on its economy as Omicron cases rise. Authorities have said they will try to contain the outbreak at the lowest cost.
The surge in reinsurance acted as a balm for the already cheap stocks that had taken a further dip last week on fears of delisting, the People’s Bank of China refusing to cut interest rates as some expected and concern that China could face devastating sanctions itself if it is unable to remain neutral in Russia’s war on Ukraine.
I thought the
iShares MSCI China
(MCHI) publicly traded fund and the
KraneShares CSI China Internet
The ETF (KWEB) posted double-digit gains on Wednesday, retired again on Thursday and is on losses of 35% and 61% respectively over the past year.
While Beijing may have pulled sentiment out of the abyss and improved the stock structure, investors need to pick their seats and be clear about China’s challenges in handling its economic slowdown and its delicate balance in supporting its friend Russia. without getting drawn deeper into a geopolitical hoax.
“It feels more like a temporary response to the current weakness,” Julian Evans-Pritchard, a senior Chinese economist at Capital Economics, says via email. “It would be naïve to assume that the policies and regulatory headwinds facing the tech and real estate sector are now gone.”
After last year’s turmoil, policymakers prioritized stability for months before the 20th Party Congress, when President Xi Jinping is expected to take up a third term, a reason by Barron he said in January that Chinese equities could be prepared for a turnaround.
But it’s not all smooth: “The remarks were important to set the tone: that it doesn’t go back to Maoism, but it doesn’t change the main issues that drive Chinese equities,” says Michael Kelly, global head of multi-asset strategies at PineBridge. Investments, which oversees nearly $ 149 billion and adds it’s not even clear where the policy will go after Xi is anointed for life.
For now, there is little change in Beijing’s core priorities, many of which could contribute to margin erosion. This includes his efforts to address inequality in part by pushing companies to advocate for social good and creating a level playing field for companies, says Kelly. Also a concern: the slowdown in the Chinese economy. Joyce Chang, president of global research for
JP Morgan, says the first thing investors will turn to is economic data to see if they support a recovery or have been jeopardized by Omicron.
The feeling of well-being cannot be dismissed in the short term. Louis Lau, co-manager of the Brandes Emerging Markets Value fund, says policy follow-up must take the form of interest rate cuts and stronger support for the housing market. He is adding to Chinese equities, especially Macau gaming and travel titles, which should benefit from easing China’s Covid policies and eventual reopening.
GQG Partners President Rajiv Jain favors cyclicals like
Chinese business bank (3968: Hong Kong), which will benefit from increased government spending and loan growth as the economy picks up.
Internet giants at the center of last year’s rout are poised to benefit from a rebound, with value managers like Ginny Chong, head of Chinese equities at Mondrian Investment Partners, attracted by dominant companies operating at deep discounts, such as
Alibaba Holding Group (BABA), which has lost half of its market value,
Tencent Holdings (700.Hong Kong),
Baidu (BIDU) e
Self-home (ATHM), which at its lows was trading for less than its cash.
Some of these companies face challenges that could limit the upside, including regulation hindering promising areas like fintech and ongoing monitoring of data security. Instead of recovering previous multiples of 20x earnings, valuations could end up closer to low- or mid-range, some managers say. With 9x earnings forward for Alibaba, this still represents an upside, although it could come from volatility.
However, if US and Chinese regulators compromise to avoid mass delisting, internet stocks would be among the biggest beneficiaries. But so far the SEC hasn’t returned China’s more conciliatory tone, and financial managers say they still prefer Hong Kong-listed versions of these shares given China’s push to reduce its dependence on the U.S. The SEC didn’t immediately respond to a request How? ‘Or what.
Even greater political risks loom. Congress is debating a bill that would look into outbound investment, potentially damaging China’s long-term investment prospects, and the sanctioning threat looms. President Joe Biden and Xi are expected to speak on Friday. If China confirms that it will not offer Russia a lifeline, that could help thaw US-China relations, offering yet another impetus to action in the short term.
“The stocks triggered a put policy but will remain highly volatile; this is still a stock picking market, ”says Rory Green, Chinese chief economist at TS Lombard.
As a financial manager looking at Chinese equities pointed out: China is not for the faint of heart, but starting to search among recent wrecks could be fruitful.
Corrections and amplifications
Joyce Chang is president of global research for JPMorgan. An earlier version of this article incorrectly identified her as the head of global research for the company.
Write to Reshma Kapadia at email@example.com