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Thursday, December 2, 2021

Global investors turn cautiously optimistic about China

Three months after the regulatory shock, investors and analysts began to be optimistic about China, which made some people wonder whether China has become a forbidden zone for fund managers.

HSBC increased the Chinese stock market last week, predicting that the Chinese stock market is approaching its lowest point and will resume growth for the first time since Beijing issued comprehensive regulatory controls to control industries ranging from technology to education.

The bank said it is advising customers to start buying again, and customers have been calling to discuss opportunities. “I expect [clients] Herald van der Linde, chief Asian equity strategist at HSBC, said that I would like to increase my holdings in Chinese stocks, but they actually told me they have the same idea.

“Looking forward to 2022, market sentiment will be very different,” he said, noting that it will be a “political year” due to the 20th Congress of the Communist Party of China in November. “Usually leaders don’t want things to become very unstable in such a year.”

Fidelity, which manages $738 billion in assets, said it has become “more and more active” towards China and has begun to increase its exposure. “When people ask whether Evergrande will become China’s Lehman Brothers moment, and whether the Chinese investment case is broken, we… said Paras Anand, chief investment officer of Fidelity Asia Pacific.

Analysts at Nomura Securities also stated that investors “should gradually seek to rebuild their reduced positions in China”, adding that “there are more and more signs that the recent negative sentiment is fading.”

The histogram of Shanghai-Shenzhen-Hong Kong Stock Connect Net Inflow (US$ billion) shows that foreign buying of Chinese stocks rebounded after the July turbulence

Due to strict new restrictions imposed by regulators on one industry after another, the market has experienced a painful rout, prompting many traders to avoid some of the big names in the Chinese stock market, and since mid-February, the market value has evaporated by more than $1 trillion.

Goldman Sachs analysts cited 50 Chinese stocks that they believe can avoid the policy traps of President Xi Jinping’s “shared prosperity” campaign, which aims to correct a period when capitalism improved living standards but also created a huge gap between rich and poor.

The investment portfolio includes companies related to topics such as renewable energy, mass consumption, manufacturing, and state-owned enterprise reform. Analysts say it is best to avoid “socially important” industries, such as housing or education.

Anand said the negative sentiment towards China is out of touch with the fundamentals of most companies in the country.

“The style of regulatory intervention is swift, but it heralds a clear economic strategy,” he said. “It is a wrong description to say that China has become uninvestable.”

The line chart of stock benchmark performance (index is 100) shows that the performance of Chinese stocks is dragged down by the blow and slowdown

Some people are still cautious. Credit Suisse analysts said that China is facing a sharp slowdown in growth and further regulatory headwinds, and it is “premature to return to China” for stock investors.

Fidelity also urged caution. Anand warned: “Assuming that we have seen the last regulatory tightening measures wrong.”

Global funds still overwhelmingly reduce their holdings in China. Data from data provider Copley Fund Research shows that last month, managers of active global equity funds cut their allocation to China to their lowest level in four years.

China has become the largest market in Asia, and most funds have reduced holdings. Some investors say this has caused a disconnect in Asian stock markets. For example, according to HSBC, Indian stocks have never been so expensive compared to China.

But foreign purchases of Chinese stocks have shown signs of a gradual rebound. After the sharp decline in July, net inflows to China’s onshore stock market have exceeded US$4 billion per month, although this is only about half of the June level.

The benchmark CSI 300 Index of large Chinese stocks has fallen 5% this year, while large technology groups listed in Hong Kong and New York have fallen by more than 20%.

“When people say that China is not an investable stock market, I start to think we may be near the bottom. This is. It just doesn’t work as people think,” Van der Linde said.

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