China equities seen as offering value amid regulatory crackdown sell-off, analysts say
China’s stock and bond markets have been hit this month by the latest regulatory crackdown and a tighter bias in monetary policy to curb excessive leverage in financial and real estate markets.
But analysts say the government’s stance is healthy for the long-term development of Chinese capital markets, and that the current bout of weakness in equity markets could be an opportunity.
Sectors such as medicine, construction and environmental protection may prove to be resilient even under tighter liquidity conditions, as they align with China’s aim to transition into a service-oriented economy.
“If we see the market go down further, it could be an attractive level to buy as the [financial clampdown] measures will not change the fundamentals of the companies we like nor the broader economic landscape. We remain constructive on China given macro stabilisation ahead of the Party Congress,” said Catherine Yeung, investment director at Fidelity International.
The Politburo said this week the government should attach great importance to preventing and controlling financial risks and step up punishment of illegal activities in the financial industry.
Media reports indicate that authorities have tightened surveillance of entrusted investments among different financial institutions and are clamping down on excessive leverage, including margin lending and the shadow banking system.
In a related move, the People’s Bank of China has started to tighten monetary policy.
The central bank hiked the 7-day reverse repo rate in open market operations by 20 basis points and also raised rates on the Standing Lending Facility and the Medium Term Lending Facility in the first quarter, lifting the base curve in the money market across all tenors.
In response, onshore bonds dropped the most this year while the Shanghai Composite has unwound all of its first quarter performance. The A-share premium over H-shares, is also narrowing after rallying at the end of the last quarter.
“Money may gradually be diverted away from the stock market and into the real economy, causing bouts of market liquidity tightness,” CIFM Asset Management HK said in a research note Wednesday.
CIFM, whose parent company is a joint venture of JPMorgan Chase, said that the ratio of the stock market’s turnover to securities settlement has risen to 37 per cent, which is above the 35 per cent level that has historically exerted pressure for the stock market to correct.
However stock selection may prove to be important over index tracking under these market conditions. Health care, environmental protection and construction could be sectors to benefit this year, CIFM said.
China’s “Belt and Road Initiative” is expected to be a major investment theme, with the construction sector moving independently of the broader stock market. A policy to promote public-private partnerships funding for infrastructure is also expected to help the sector.
CIFM predicts continuing growth in the construction sector this year, with the industry set to expand 20 per cent on an annual basis, after rising about 4 per cent in the first quarter.
The belt and road summit in Beijing in May could be a market catalyst. For example, in 2016, the State Grid signed contracts totalling US$2.3 billion for countries including Russia, Mongolia, Kyrgyzstan which are involved in the global trade initiative to build 10 interconnected power transmission lines, CIFM said.
About 20 Asian, European, African and Latin American countries had confirmed that they participate at the summit, according to comments by State Councillor Yang Jiechi reported in the state-run China Daily in February.
Meanwhile investing in Chinese medicine is also seen as a safe-haven strategy. For example, Chinese herb e jiao has seen its retail price increase 23 times in the past 10 years to 5,396 yuan (US$783) per kilogram.
Production of new energy cars is also expected to bottom out in the first quarter before increasing thereafter, CIFM said.
“With the reporting season showing some good results, coupled with the stable economic backdrop, we expect Chinese stocks will be supported by strong fundamentals and reasonable valuations,” Fidelity’s Yeung said.