Chinese investor confidence rising amid deregulation, earnings growth, says Barings
Laura Luo, the bank’s head of Hong Kong, China equities, says while China’s economic growth is set to slow, the pace will be gradual, allowing time to handle local government debt problems and continue with supply-side reforms
Foreign investors’ have been trimming their exposure to China’s banking and financial sector but that may change as confidence in the nation’s liberalisation and reform efforts is rising, amid corporate earnings growth this year, according to Laura Luo, head of Hong Kong, China equities at Barings.
While China’s economic growth is set to slow, the pace will be gradual, Luo said, allowing time for the government to handle its local government debt problems and continue with its supply-side reforms– introduced in early 2016 with the aim of eradicating idle capacity in heavy industry.
Earlier this month, central bank governor Zhou Xiaochuan warned about financial risks, arguing that deepened reform and opening up are the priorities to proactively controlling such risks in China’s financial sector.
“People were previously very sceptical that China’s reforms would actually yield results,” Luo said. “But the quality of China’s growth has indeed improved while concerns toward the banking system have eased somewhat.”
China’s decision last week to allow foreign firms to take controlling stakes in domestic financial joint ventures, including banks, securities, asset managers, and insurers, comes after a string of overseas institutions sold stakes to local partners in Chinese banks, securities and mutual funds, because of policy opacity and cutthroat competition.
Further consolidation of central power that was highlighted in China’s 19th Party Congress also triggered concerns whether the financial sector would become even less transparent and more government-determined rather than market-oriented.
““They got burnt once and they are not going to do it again unless they are offered better odds,” added Olivier d'Assier, head of applied research for APAC at Axioma.
“Right now, risk in China is much lower than it was two years ago, but it is still riskier than a lot of other countries.”
Structural reforms, however, have eliminated smaller companies, paving the way for larger players in overcapacity sectors over the past two years, boosting corporate earnings and confidence among overseas investors, Barings’ Luo said.
Growth in earnings per share for MSCI China index, which includes both large and mid caps, was minus 3.28 per cent in 2016, but is forecast to grow 21 per cent this year and 15 per cent in 2018.
“Overseas investor confidence in China is increasing. Allowing foreigners to increase their proportion in local firms will give foreigners more control and means even more room for improvement,” Luo said, adding she likes Chinese stocks in consumer discretionary and staples, technology and automated industries, health care, education and tourism sectors.
At the same time the low volatility of the stock markets create difficulty to generate returns, causing investors to become even more tolerant of market risks and boosting fund inflows.
“China’s volatility is trending down. The economy is doing better, and people are less worried about a hard landing,” d’Assier said.