Investors return to Chinese stocks after Covid and geopolitics triggered sharp sell-off

Investors return to Chinese stocks after Covid and geopolitics triggered sharp sell-off


Global investors return to Chinese stock markets after widespread year-end sell-off caused by draconian restrictions on Covid-19, the geopolitical implications of Russia’s war in Ukraine and the lingering effects of repression regulatory.

The country’s CSI 300 index began in 2022 with the worst quarterly drop since a debt-fueled bubble burst seven years ago in Shanghai. From there, it continued to fall to 17 percent this year, surpassing the falls in other major national benchmarks. Global investors have made 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 Rmb 28 billion ($ 4.2 billion) net in mainland China shares over the past week. This still leaves total holdings low since their January high, but it also occurs when the CSI 300 has gained nearly 9 percent from its lowest point in April.

“This is a good time to return to the market, in a relative and absolute way,” said Vincent Mortier, investment director at Amundi Asset Management, which manages 2 billion euros in funds. “The current weakness in prices is a great opportunity in stocks and credit.”

Mortier cited a number of reasons for his positive stance. A repressive crackdown on everything from educational technology to gaming has cooled, reducing stock prices last year and causing some fund managers to consider the country uninvertible.

Meanwhile, he believes that speculation that China could be next in line with US financial sanctions over Russia’s reaction to Ukraine’s invasion of Ukraine is widespread, he believes. “You should fight this. We don’t think China will get into this trouble,” he said.

In addition, although the country’s real estate sector remains under tension after the collapse of developer Evergrande last year, it shares the popular opinion among Western investors that it will not become a full-fledged crisis that encompasses all the economy. “It’s not at all a situation like the one in 2008,” he said.

Chart showing land holdings through Hong Kong's Stock Connect

Others agree. “We have increased our allocation to Chinese equities,” said Stéphane Monier, investment director at private bank Lombard Odier. “They have worked very poorly and the reasons for this have begun to reverse.”

To do so, Monier has moved away from other emerging markets that had a stronger start in 2022 and has been reassigned to China. Brazil, for example, “had a good career,” he said.

Hopes that Beijing may soon ease more of its tougher Covid containment measures also boost expectations of a rebound in Chinese stocks. Shanghai reopens after two months of blockade.

Some even suspect that these reopenings could help boost markets around the world, which have suffered in the first months of 2022. “As we have seen in other countries, when you remove the restrictions, you can see a very strong rebound.” said Gareth. Colesmith, head of macro research at Insight Investment.

But caution may be needed. “The downside is that when they open, you don’t get that advantage 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 seep in 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 financing conditions.”

The image of the bonds is a little different. Last week, China expanded access to its land bond markets, providing offshore investors with a way to borrow renminbi through Hong Kong’s Bond Connect program. The move came after record renminbi bond releases came out this year. But investors are hesitant to push big inflows when the reforms go into effect later this month.

China’s 10-year government debt yields now stand at 2.8%, almost exactly in line with equivalent US government bonds. “Last year, our position in China outweighed sovereign debt, but… We switched to U.S. debt when it yielded about 3.2 percent,” said Monier de Lombard. Odier.

“This opening is conducive to the allocation of long-term assets to China, but the short-term impact on inflows could be quite limited, given concerns about the economy and also the yield differential,” he said. dir Jenny Zeng, co-cap. Asia-Pacific Fixed Income to AllianceBernstein.



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