MacroscopeChinese stocks may be cheap but that doesn’t mean they’re a good buy

Name: China records second Omicron case, further tightens measures to contain latest Covid-19 outbreaks
Uploaded: 2021-12-16T07:15:20.000Z
Duration: 1 min 53 s
Description: China records second Omicron case, further tightens measures to contain latest Covid-19 outbreaks

Sentiment has vastly improved, with investors drawn by low prices and assumptions of looser policy

Yet, Beijing’s regulatory crackdown, the threat of broader contagion from struggling developers and other factors should give them pause

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An investor monitors stock price movements at a securities company in Shanghai on September 24. Chinese stocks are attractively priced compared to those in the US, but there are still reasons to be cautious. Photo: AFP

Nicholas Spiro

Published: 3:15pm, 16 Dec 2021

Sentiment towards mainland Chinese equities has undergone a perceptible shift in the past few months. Following a period of extreme bearishness which caused the benchmark CSI 300 index of large Shanghai- and Shenzen-listed shares to lose 18 per cent between February 9 and July 27, the mood among investors has improved noticeably.

Last week alone, foreign investors purchased US$7.7 billion of mainland stocks – a record amount since the start of the Covid-19 pandemic – via trading links with Hong Kong, according to Bloomberg data. The CSI 300, which is up almost 4 per cent this month, is close to erasing all its losses for the year.

Compared with the stellar performance of the FTSE All-World Index, a gauge of global equities that has risen around 15 per cent this year, Chinese shares remain in the tank. This is especially so for offshore stocks, which have suffered much steeper declines. Yet, as is often the case in markets, all it takes is a shift in expectations for asset prices to move in one direction or the other.

A growing number of investors believe Chinese macroeconomic policy has reached an inflection point. The combination of the severity of the shocks to the economy – a sharp property-driven downturn, growing signs of financial contagion, coal and power shortages and regular shutdowns amid the government’s unwavering “zero-Covid” policy – and a series of growth-friendly statements and measures has convinced some China-watchers that Beijing is leaning towards looser policy.

Markets have seized on a change in tone on the part of policymakers. Of particular significance to investors has been the government’s frequent use of the word “stability” when setting the policy direction for the next few years.

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China records second Omicron case, further tightens measures to contain latest Covid-19 outbreaks

Never mind that easing measures have so far been modest and accompanied by statements reiterating Beijing’s commitment to deleveraging and taking the heat out of the property market. The signal that the government is more concerned about the slowdown and plans to take steps to shore up demand has been enough to lift sentiment.