China Has Gone From ‘Uninvestable’ to Compelling, Allocators Say

By Nick Hedley

Chinese equities have been off limits for many global institutional investors following a far-reaching regulatory clampdown in the world’s second-largest economy. But as the dust settles, some allocators say there are now opportunities that are hard to ignore.

Investor sentiment towards China has been severely dented by a string of regulatory interventions, starting with a move to scrap Ant Group’s initial public offering in November 2020. Much of the focus has been on curbing alleged monopolistic behavior in the tech sector, which has seen a sharp decline in valuations as a result.

A number of institutions, including JPMorgan Chase & Co., have declared Chinese equities “uninvestable”.

“Two years ago, there were 1,000 reasons to exit China as COVID restrictions hurt the economy and regulator developments impacted sentiment,” says Tim Rocks, chief investment officer at Australian investment manager Evans & Partners.

“But a lot of those risks are significantly turning, and I see no reason why China won’t slingshot out of lockdown like other countries did, particularly with the amount of stimulus coming through ahead of the Communist Party National Congress in October,” Rocks tells Markets Group.

While most large economies are flirting with a recession, Rocks says China “is in a totally different part of the economic cycle and is about to accelerate. Yet markets don’t reflect that – valuations are low.”

Rocks thinks high-beta Chinese equities, including tech stocks listed in Hong Kong, are likely to recover.

Hou Wey Fook, CIO at Singapore’s DBS Bank, also turned bullish on Chinese equities in recent months.

“We believe Vice Premier Liu drew a line in the sand by stating China’s commitment to support growth and business regulation,” Hou writes in his third-quarter CIO Insights report.

Despite a partial recovery in valuations in recent weeks, Chinese equities are still trading at a significant discount to global stocks on a forward price/earnings basis.

China is also “massively under-owned” by institutional investors, and this could start to change.

Further, Hou says there are “signs of easing in China’s tech crackdown,” with authorities encouraging more homegrown tech listings.

And stimulus measures should result in domestic corporate earnings growth rebounding to mid-teen percentages in 2023.

New York-based alternative asset manager Weiss Multi-Strategy Advisers also believes concerns about regulatory risks are overblown.

Mike Edwards, deputy CIO at Weiss, is optimistic about the tech sector in particular, but notes that most other institutions do not yet share the same sentiment.

“I was recently at a dinner with numerous CIOs of asset management firms in New York and I was the only person at that table who responded affirmatively to ‘Is China Tech Investable?’” Edwards says. “Far from being daunted by such a contrarian view, I think that anecdote is supportive of the view that the bad news is more than priced in.”

So far, that view has paid off – Chinese equities have staged a partial recovery over the past two months thanks to easing lockdown restrictions and regulatory interventions.

But economists say the sustainability of the rally will depend on China’s economic prospects.

“We have highlighted that, against the backdrop of high overall and youth unemployment, a full recovery in consumption could be time consuming, and more importantly, the impact of a frontloaded fiscal stimulus may wear off in 2023,” says Sanjay Mathur, chief economist for Southeast Asia and India at Australia-based ANZ.

ANZ expects China’s GDP growth to slow from 5% this year to 4.2% in 2023. “Furthermore, we have emphasized the fragility of the post-lockdown recovery,” Mathur says.

Richard Yetsenga, ANZ’s chief economist, adds that the pandemic “is likely to spark the next stage of China’s regression towards mean global growth rates of 2% to 3%.”

“There are several instances of economies beset by apparent short-term shocks that ended up being lasting economic changes: Neither Australia after the 2000s boom nor Japan after its bubble burst in 1991 returned to previous rates of growth,” Yetsenga says in a research note. “The pandemic could well be such a catalyst for China.”