Global investors are returning to China’s stock markets after a widespread sell-off earlier this year triggered by draconian Covid-19 restrictions, the geopolitical implications of Russia’s war in Ukraine and the lingering effects of regulatory crackdowns.
The country’s CSI 300 stocks index started 2022 with the worst quarterly drop since the popping of a debt-fuelled bubble seven years ago in Shanghai. It kept falling from there to leave it down 17 per cent this year, outstripping declines on other major national stocks benchmarks. Global investors have pulled out billions of dollars a month.
But now some international money managers are betting that the worst is over. Offshore investors using Hong Kong’s Stock Connect trading scheme have bought a net Rmb28bn ($4.2bn) of mainland Chinese equities over the past week. That still leaves total holdings down from their January peak, but also comes as the CSI 300 has gained almost 9 per cent since the low point in April.
“It’s a good time to come back to the market, on a relative and absolute basis,” said Vincent Mortier, chief investment officer at Amundi Asset Management, which looks after €2tn in funds. “The current weakness in prices is a big opportunity in equities and credit.”
Mortier cited a range of reasons for his positive stance. A regulatory crackdown on everything from educational technology to gaming, which cut into share prices last year and led some fund managers to deem the country uninvestable, has cooled off.
Meanwhile, speculation that China could be next in line for US financial sanctions in the wake of the reaction to Russia’s invasion of Ukraine is wide of the mark, he believes. “You should fight against that. We don’t think China will get into these issues,” he said.
In addition, while the country’s real estate sector remains under strain after the collapse of developer Evergrande last year, he shares the popular view among western investors that it will not balloon into a full-blown crisis that engulfs the entire economy. “It’s not at all a situation like 2008,” he said.
Others agree. “We have increased our allocation to Chinese equities,” said Stéphane Monier, chief investment officer at private bank Lombard Odier. “They have performed extremely badly and the reasons for that have started to be reversed.”
To do this, Monier has backed away from other emerging markets that had a stronger start to 2022, and reallocated to China. Brazil, for instance, “had a good run”, he said.
Hopes that Beijing could soon ease more of its harshest Covid containment measures are also fostering expectations for a rebound in Chinese shares. Shanghai is reopening after two months of lockdowns.
Some even suspect such reopenings could help to boost markets around the world, which have suffered in the early months of 2022. “As we’ve seen in other countries, when you remove restrictions you can see a really strong bounce,” said Gareth Colesmith, head of macro research at Insight Investment.
But caution may be warranted. “The downside risk is that we find when they open up, you don’t get that upside that you’ve seen in other countries,” said Robert St Clair, a strategist at Fullerton Fund Management in Singapore. “The external environment is much weaker.”
In addition, problems in China’s real estate market continue to percolate even as markets’ focus shifts to reopening in Shanghai. On Tuesday, analysts at rating agency Moody’s warned that Chinese developers “continue to experience liquidity stress amid weak sales and tight funding conditions”.
The picture for bonds is somewhat different. Last week, China expanded access to its onshore bond markets, providing offshore investors with a way into renminbi debt through Hong Kong’s Bond Connect programme. The move came on the heels of record outflows from renminbi bonds this year. But investors doubt it will spur huge inflows when the reforms take effect at the end of this month.
Yields on China’s 10-year government debt now stand at 2.8 per cent, almost exactly in line with equivalent US government bonds. “Last year, our China positioning was overweight sovereign debt, but . . . we switched to US debt when it yielded around 3.2 per cent,” said Lombard Odier’s Monier.
“This opening up is supportive for long-term asset allocation to China, but the near-term impact on inflows could be quite limited, given concerns on the economy, and also because of the yield differential,” said Jenny Zeng, co-head of Asia-Pacific fixed income at AllianceBernstein.