The China sell-off and where it hurts
Investors in transport and infrastructure have lost the most, but 'new China' stocks in gaming and technology show winners can be found
Jasper Moiseiwitsch and Benjamin Robertson
Everyone knows China equities have had a tough time of late, but which sectors have been particularly under the gun?
A survey of the CSI 300 indices, which track the main industry sectors of mainland-listed equities, shows which industries have been most heavily sold down by investors: since the start of the year, energy stocks are down 13.5 per cent, health care is off 11.1 per cent and China transport shares have shed 10.2 per cent.
Tracking movements since the end of 2007, to encompass the full impact of the global financial crisis, the sell-off has been much more severe: utility stocks are down 67 per cent, infrastructure has dropped 70 per cent and transport stocks are off a whopping 79 per cent. (see graph).
There is a clear disconnect between China's economy and its share market. Mainland gross domestic product roughly doubled from 2008 to 2012. The CSI 300, a benchmark index for the A-share market, dropped 53 per cent in the period.
But there are intriguing outliers - the MSCI China Information Technology Index has climbed 204 per cent since the end of 2007 (although it is off fractionally since the start of the year). The share price of SJM, a Macau gaming stock, has risen 6½-fold since listing in July 2008, and the shares of technology firm Tencent are up 7 ½-fold since end-2007.
It all points to a widening divergence between hard-core industrial stocks that are increasingly being sold down and the so-called new-China stocks that investors believe define the future of the mainland economy.
"Tech and Macau gaming, they are new China. They get a much bigger allocation of investor interest right now because no one wants old China anymore," said Mark Matthews, an economist for Julius Baer, a private bank.
Shao Jiong, head of Hong Kong and China research at Macquarie, said the main benchmark indices tracking China equities were heavily weighted towards giant old economy stocks, such as state-controlled banks, energy firms and telecommunications entities. Investors are selling these stocks, exaggerating the falls in the benchmark indices.
"Just because the index has done poorly, it does not mean there are few stocks that have done well. In fact, there are a number of stocks that have done amazingly well," said Shao. Investors are discounting bread-and-butter industrial and financial stocks, and embrace what are perceived to be higher-growth plays, such as information technology, environmental services, tourism, gambling and health care.
"The traditional sectors like banking, coal, oil and telecoms are not performing well. We are looking at different themes, such as the environment, health and urbanisation," said Mona Chung, chief investment officer for CIFM Asset Management. Chung favours small, privately owned firms in more dynamic sectors. By way of reference, the ChiNext index, which tracks small-cap stocks listed on Shenzhen exchange's second board, is up 37 per cent in the past 12 months.
Investors see the limits of old China, said Matthews in a report, identifying issues like extreme pollution, an over-built property market and a way of doing business that involves systemic corruption. Investors also have "growing doubts about the Chinese economy and its capacity to rebalance", said Alexis Garatti, an economist at Haitong International Securities.
For example, the big four state banks - including Bank of China, China Construction Bank, Industrial and Commercial Bank of China - trade at just five times current earnings, partly on the view their profits and asset bases are deteriorating.
"The appetite for blue chips is weak," said Olive Xia, who covers banks and insurance companies for brokerage Core Pacific-Yamaichi.