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After a sharp sell-off triggered by Covid and geopolitics, investors are returning to Chinese stocks

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, international investors are returning to China's stock markets.

The CSI 300 stocks index in China began 2022 with the worst quarterly drop since a debt-fueled bubble burst in Shanghai seven years ago. It continued to fall from there, dropping 17% this year, outpacing declines in other major national stock benchmarks. Hundreds of billions of dollars have been taken out of the market each month by international investors.

However, some international money managers now believe the worst is behind them. Over the last week, offshore investors using Hong Kong's Stock Connect trading scheme have purchased a total of Rmb28 billion ($4.2 billion) in mainland Chinese equities. Total holdings are still down from their January highs, but the CSI 300 has gained nearly 9% since its April low.

"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 manages €2 trillion in assets. "The current weakness in prices is a big opportunity in equities and credit."

Mortier stated that he is optimistic for a variety of reasons. Last year's regulatory crackdown on everything from educational technology to gaming, which caused stock prices to plummet and led some fund managers to declare the country uninvestable, has eased.

Meanwhile, he believes that speculation that China will be the next target of US financial sanctions in response to Russia's invasion of Ukraine is exaggerated. "You should fight against that. We don’t think China will get into these issues ," he stated.

Furthermore, while the country's real estate sector remains strained following the collapse of developer Evergrande last year, he shares the widely held belief among western investors that it will not erupt into a full-fledged crisis engulfing the entire economy. "It’s not at all a situation like 2008," he explained.

Others concur. Stéphane Monier, chief investment officer at private bank Lombard Odier, said, "We have increased our allocation to Chinese equities.  ."

Monier has done this by shifting away from other emerging markets that had a better start to 2022 and reinvesting in China. Brazil, for example, he said, "had a good run."

Hopes that Beijing will soon relax some of its toughest policies Containment measures implemented by Covid are also encouraging investors to expect a rebound in Chinese stocks. After two months of lockdowns, Shanghai is reopening.

Some even believe that such reopenings will help to boost global markets, which have struggled in the first 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.

However, caution is advised. "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."

Furthermore, even as markets' attention shifts to Shanghai's reopening, problems in China's real estate market persist. Chinese developers "continue to experience liquidity stress amid weak sales and tight funding conditions," according to analysts at rating agency Moody's.

The situation with bonds is a little different. Last week, China opened up its onshore bond markets to foreign investors through Hong Kong's Bond Connect program, which allows them to invest in renminbi debt. The decision followed a year of record outflows from renminbi bonds. Investors, on the other hand, doubt that the reforms will result in massive inflows when they go into effect at the end of this month.

China's 10-year government bond yields are now at 2.8 percent, almost identical to equivalent US government bonds. "Last year, our China positioning was overweight sovereign debt, but when it yielded around 3.2 percent, we switched to US debt," said Lombard Odier's Monier.

"This opening up is supportive for long-term asset allocation to China," said Jenny Zeng, co-head of Asia-Pacific fixed income at AllianceBernstein. "But the near-term impact on inflows could be quite limited, given concerns on the economy, and also because of the yield differential," she added.



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