Why better times could be ahead for the Chinese stock market


People walk past an electronic screen showing the Hang Seng Index in Hong Kong’s central district on May 27.BERTHA WANG/AFP/Getty Images

Chinese stocks are tumbling on the back of rising COVID-19 cases in the world’s most populous country, but that’s not negating their strong rebound in recent months. The MSCI China index has risen another more than 20% since early May, when it hit what now appears to be a low.

This is a remarkable recovery, given that the world’s second-largest economy has been challenged this year by outbreaks of COVID-19 – including one that led to the lockdown of Shanghai, home to the world’s largest seaport. world, in the spring – as well as continued global supply chain restrictions and uncertainty surrounding Beijing’s regulatory crackdown on tech stocks. Just a few months ago, these factors led some Western market watchers to openly question whether China had become “uninvestable.” So, for investors who have weathered the recession, the recent rise in Chinese equities is certainly welcome. The question, however, is whether the recovery is sustainable.

This is very well possible, largely because of three developments. One is a subtle change in the central government’s COVID-19 policy, despite renewed concerns about the impending further lockdowns. Another concerns the gradual smoothing of supply chains as 2022 progresses. And finally, Beijing has begun to introduce significant economic stimulus measures, as well as policy reforms that could trigger a recovery in consumption. Taken together, these trends can provide tailwinds for China – and for Chinese equities.

China’s tough line on COVID-19 outbreaks is among the toughest in the world. Shanghai’s lockdown, which began on March 28 and lasted much of May, provided an extreme example, and the enforcement of “zero-COVID” policies there had an even greater impact on Chinese and global economies that the Wuhan quarantine returned in January 2020, when the pandemic was just beginning. Shanghai is not only China’s largest city, with a population of around 25 million, but also a major shipping hub, and its factories produce key components for cars, mobile phones and other consumer goods. Unsurprisingly, the city’s effective shutdown for two months – along with a series of shutdowns, restrictions and stay-at-home orders in other Chinese cities earlier this year – contributed to revisions to the significant drop in estimates of economic growth. The current consensus is that China’s GDP growth will rise 4.5% this fiscal year, according to Bloomberg, well below the government’s target of around 5.5%.

Still, a shift in China’s pandemic approach appears to be underway, and it quickly followed the Shanghai debacle. Government officials have started calling their zero COVID policy “dynamic” – with the emphasis on “dynamic”. The change in tone may signal more flexibility and adaptability in China’s COVID response, where the goal is less to eradicate infections than to control the spread of the disease at minimal social and economic cost. Part of the strategy is to test and adopt more closed-loop systems – for example, live employees in factories and banks to keep operations going. Meanwhile, high-frequency COVID testing and precautionary, targeted lockdowns — of individual districts or facilities, for example — could reduce the likelihood of full major city shutdowns.

If this materializes, the worst could be behind China in terms of macroeconomic shocks. May economic data confirmed that growth has bottomed out and a below-average recovery appears to be in the works. It is important to note that we expect supply chain disruptions to continue to ease throughout the summer, but we recognize the potential risk of increased COVID-19 case counts. . This is especially true if a city like Shanghai ends up returning to lockdown just weeks after the previous one ended, but drastic measures seem unlikely this time around.

Meanwhile, the macro policy response to China’s economic challenges earlier this year appears to be gaining momentum. The government is spending heavily on infrastructure, which as the economy reopens should have a positive impact on housing and consumption. And in May, Beijing rolled out a sweeping package of measures to stabilize economic conditions, including improved tax refunds, a deferral of social security contributions, lower taxes on auto purchases and more credits for homeowners. small enterprises.

While more needs to be done to support growth and bolster consumer and business confidence, these measures are a good start, and the combination of reopening and relaunch should leave more money in consumers’ pockets. This could create opportunities for investors. In particular, companies that produce and distribute baijiu – a traditional Chinese spirit which, in a country of 1.4 billion people, is also the most widely consumed alcoholic beverage in the world – could benefit from a resurgence in consumption. Two interesting names in this space are listed companies A Kweichow Moutai (600519-Shanghai) and Wuliangye Yibin (000858-Shenzhen), two manufacturers of baijiu.

Given the events of the past year, one could be forgiven for casting a skeptical eye on the recent rally in Chinese stock markets. After all, under President Xi Jinping, the central government has certainly surprised investors already. Still, healthy skepticism doesn’t have to mean ignoring clear signals. For one thing, the regulatory crackdown on internet companies that began last year — and rattled investor confidence in China — appears to be over or at least halted. And government officials talk about a more market-friendly game. In a recent conference call, they said “economic development is the foundation and the key to solving all of China’s puzzles” – a remarkable statement that they clearly intended to boost market confidence. If they think so, Beijing might finally recognize a reality expressed by American political strategist James Carville 30 years ago: “It’s the economy, you idiot.”

AGF holds shares in Kweichow Moutai Co. Ltd. and Wuliangye Yibin Co. Ltd.

Regina Chi is Vice President and Portfolio Manager at AGF Investments Inc.

The views expressed are those of the author and do not necessarily represent the views of AGF, its subsidiaries or any of its affiliates, funds or investment strategies. References to specific securities should not be considered investment advice or recommendations.


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