BlackRock likes financials, industrials as China’s growth becomes more sustainable

Lu Wenjie, BlackRock’s China investment strategist, says a lot of financial institutions have cut their exposure to the shadow credit market, meaning the overall financial system has a much cleaner balance sheet

PUBLISHED : Wednesday, 26 July, 2017, 6:44pm
UPDATED : Wednesday, 26 July, 2017, 10:41pm

Global investors are likely to add weight to Chinese equities this year as financial deleveraging by the government leads to more sustainable economic growth, according to Lu Wenjie, China investment strategist at BlackRock, the world’s largest money manager.

While China’s economic growth is expected to slow in coming quarters, the pace will be gradual given this round of recovery was not led by government stimulus, Lu said.

He described the private sector as in good shape after deleveraging of their balance sheets. Private enterprises are also actively adopting new technology in their business models, with investments in that accelerating to 7 per cent.

A lot of financial institutions have also cut their exposure to the shadow credit market, meaning the overall financial system has a much cleaner balance sheet, with sufficient capital for protection in the face of future risks. Money supply M2 growth has also dropped to single digits for the first time in decades.

BlackRock particularly favours Chinese financial and industrial stocks, where many investors are heavily underweight.

“The Chinese government has already started financial deleveraging and this will help sustainability in economic growth,” Lu said.

In addition to receiving inflows from global investors, Hong Kong’s stock market will this year continue to be boosted by Chinese mainland investors, who want to diversify their portfolios away from their home market.

Holdings of foreign assets, or non-yuan denominated assets, at Chinese insurance companies, currently account for less than 3 per cent of total portfolios, so Hong Kong stocks are likely to be favourites.

The Hang Seng Index has gained 22 per cent so far this year while the Hang Seng China Enterprises index, commonly known as the H-share index, is 15 per cent higher.

In the A-share market, however, fund flows from both domestic institutions and retail investors may take a while to pick up because liquidity is still an issue, Lu said, adding that China’s financial deleveraging will mean many financial institutions will see slower growth in their balance sheets.

Valuations for some Chinese tech companies also look stretched after outperforming the index this year. Long term, however, these companies are likely to compound their earnings more sustainably, with many Chinese e-commerce companies having adopted artificial intelligence to improve efficiency and lower costs.