Ukraine war: risk of sanctions puts China stocks in valuation, geopolitical traps as companies face Russia dilemma

Name: What China could gain, and lose, in the Ukraine-Russia crisis
Uploaded: 2022-03-29T01:30:17.000Z
Duration: 7 min 14 s
Description: What China could gain, and lose, in the Ukraine-Russia crisis

Chinese stocks are on ‘cheap sale’ after a US$2.4 trillion sell-off in both onshore and offshore markets since Russia invaded Ukraine

What investors cannot price, however, is the risk of sanctions on China’s biggest companies

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Russian President Vladimir Putin, left. and Chinese President Xi Jinping pose for a photograph during their meeting in Beijing last month. Photo: AFP via Getty Images/TNS

Cheryl Heng

Published: 9:30am, 29 Mar 2022

Chinese stocks are on “cheap sale” after a US$2.4 trillion sell-off in both onshore and offshore markets since Russia invaded Ukraine. What investors cannot price, however, is the risk of sanctions on China’s biggest companies.

As a result, investors should favour markets that are least exposed to the secular US geopolitical conflict with Russia and China, according to strategists at BCA Research. The risk premium-compression trade, touted by strategists at Goldman Sachs, can possibly wait.

China has refused to condemn Russia’s military aggression in Ukraine, while also publicly opposing the mounting Western sanctions on the Kremlin. That stance has presented a dilemma for Chinese firms operating in Russia, including Xiaomi, Sinopec and Alibaba Group Holding, the owner of this newspaper.

07:14

What China could gain, and lose, in the Ukraine-Russia crisis

“Chinese cooperation with other US rivals will provide more occasions for the US to punish China,” BCA strategists said in a note on March 28. “Since China will help Russia bypass sanctions, US sanctions on China are likely this year, sooner or later.”

Foreign investors pulled almost US$10.7 billion from the Chinese stock markets in the first half of this month, according to Jefferies, one of the worst drawdowns on record by the Stock Connect’s northbound investors. The capital outflow suggests global funds may see the market as a valuation trap.

03:26

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“Outflows from China on the scale and intensity we are seeing are unprecedented,” the Institute of International Finance said in a report last week. “The timing of outflows – which built after Russia’s invasion of Ukraine – suggests foreign investors may be looking at China in a new light, though it is premature to draw any definitive conclusions.”

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