China’s hyped decoupling from emerging markets may prove a blip, fund managers say

Chinese equities are seen making up lost ground as the extreme pessimism toward its economy recedes

At the same time, the gathering enthusiasm over other developing-nation equities could peter out amid a global slowdown

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A child takes a look at a bull sculpture in Beijing. Photo: AP Photo

Published: 4:25pm, 21 Aug 2022

A gulf has opened up between Chinese stocks and the rest of emerging-market equities in recent weeks as pandemic recoveries have diverged. That parting of ways is likely to be short-lived, fund managers say.

Chinese equities are seen making up lost ground as the extreme pessimism toward its economy recedes and authorities take further steps to revive stuttering growth. At the same time, the gathering enthusiasm over other developing-nation equities could peter out amid a global slowdown, causing their correlation with China to reassert itself.

“I’ve seen this decoupling story many times in the last two plus decades, it never pans out,” said Zhikai Chen, head of Asian and global emerging market equities at BNP Paribas Asset Management, which oversaw the equivalent of US$504 billion globally at the end of June. “From a trade flows perspective, and how big the Chinese economy is for commodity demand, it seems a heroic assumption.”

The MSCI China Index has dropped about 6 per cent over the past month, whereas a similar MSCI gauge tracking the rest of emerging markets has jumped 7 per cent in the same period. The same disparity has also emerged in bond markets with Chinese debt eking out a gain of under 1 per cent, compared with a 4 per cent return for emerging markets as a whole.

Pedestrians at a road junction near a display of stock indexes in Shanghai. Photo: Reuters

Valuations have become so depressed for Chinese shares that there is plenty of room for a rebound if sentiment stabilises. Authorities signalled their intention to bolster growth last week, with the central bank unexpectedly cutting a key policy rate. The government may unleash more pro-growth measures ahead of the National Party Congress expected to take place later this year, as President Xi Jinping seeks a third term.

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