Chinese stocks emerge as safe haven from bear markets globally, as US rate rise eclipses Shanghai lockdown as bogeyman

While the CSI 300 Index has risen almost 4 per cent in June, a decline in the Hang Seng Index is much smaller than the S&P 500’s
Reopening of Chinese economy bodes well for investors who can stomach short-term Covid-induced uncertainty: JPMorgan Asset Management

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Zhang Shidongin ShanghaiandCheryl Hengin Hong Kong

Published: 7:30am, 17 Jun, 2022

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Chinese stocks, which were the least coveted equities just a few months ago under the double whammy of Beijing’s zero-Covid policy and regulatory crackdown, have emerged as a safe haven from bear markets globally.

With traders pulling out of risk assets to send the S&P 500 index and the MSCI World gauge into bear territory this week, China’s markets have held up relatively well. While the CSI 300 Index of the biggest Chinese onshore stocks has risen almost 4 per cent in June, a decline in Hong Kong’s Hang Seng Index is much smaller than the US benchmark’s, with technology juggernauts from Alibaba Group Holding to Meituan staging impressive rebounds.

The turnaround by Chinese stocks, which were the world’s worst performers not so long ago, amid lockdowns in Shanghai and 40 other Chinese cities, underscores the resilience of the world’s second-largest equity market to the global rout, after a flare-up in the pandemic was largely brought under control by Beijing and policy loosening to spur growth started bearing fruit. Meanwhile, fears of a recession have been heightened after the US Federal Reserve raised its target rate by 75 basis points on Wednesday, the most since 1994, to contain inflation.

“In the emerging world, we see growing opportunities in China and the Asian region,” said Kerry Craig, a strategist for global markets at JPMorgan Asset Management. “The reopening, albeit slowly, of the Chinese economy along with fiscal and monetary policy support at very low equity multiples, bodes well for longer term investors who may be able to stomach the remaining short-term Covid-induced uncertainty.”

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The CSI 300 has rebounded 12 per cent since hitting a two-year low in April on bets pro-growth measures will arrest a slowdown in the economy. China’s key economic data for May showed recovery was strengthening as industrial production returned to growth, a decline in retail sales narrowed and fixed-asset investment met expectations.

And while the reopening has been marred by sporadic virus outbreaks and partial lockdowns in Beijing and Shanghai, the market seems to have reached a consensus that the worst of the damage to the economy is over, and that the stock valuations are attractive enough to revive buyers.

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China’s economic data “supports the view that the mainland has become very agile at keeping the export and manufacturing engines revving despite mobility restrictions”, said Stephen Innes, a managing partner at SPI Asset Management.

Chinese stocks have been decoupling from US equities since April. The 120-day correlation between the CSI 300 and the S&P 500 indexes is now less than 0.1, according to Bloomberg data. The relationship was at 0.44, at least a decade-high level, in April 2020. A reading of one means two markets move completely in lockstep, and below one suggests they are moving in entirely opposite directions.

Such a pattern has brought back overseas investors seeking shelter from the Fed-triggered storm. Foreign traders have bought 49.5 billion yuan (US$7.4 billion) of yuan-traded shares through the Stock Connect link with Hong Kong this month. They were net sellers of 21.9 billion yuan worth of stocks in the three months through May amid lockdowns.

“Global investors should take a serious look at China A shares, given their low correlation with the rest of the world and the potential diversification benefits to a global portfolio,” said Wang Qi, CEO of MegaTrust Investment in Hong Kong. “We are not saying China A shares are completely immune to US interest rate risk. But we believe that the China market will be more resilient and may trade differently from the rest of the world.”

To be sure, the rise in US interest rates is expected to have a profound impact on emerging markets including China, as most economies in Asia have to follow policy tightening to mitigate the spillover effect to rising price pressure, according to JPMorgan Asset Management.

China’s policy easing has been somewhat restrained so far, with no cut in the official lending rate, as aggressive loosening widens the interest rate spread with the US, risking a flight of capital.

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With global fund managers including Thornburg Investment Management predicting that a recession in the US is almost certain after the rate hikes, China now seems to be the only major market where they can place their bets, due to the divergence of its monetary policies from western nations.

Further cuts in banks’ reserve requirement ratios, mortgage rates and even benchmark borrowing costs are on the cards for China’s central bank, according to investment and private banks including UBP.

That pretty much makes the Chinese government the only dovish policymakers worldwide, Lombard Odier said.

“This dovish turn will definitely provide an anchor for the market, unlike other markets where policy support is being withdrawn quickly,” said Lee Homin, Asia macro strategist at Lombard Odier. “We like the market a bit more than other emerging markets that are more exposed to volatile capital flows resulting from key central banks’ tightening.”