What is more, the renminbi had fallen to its weakest level
versus the US dollar since the currency began trading outside China’s borders, while the streak of outflows from Chinese onshore bonds showed no signs of abating.
The rout in mainland and Hong Kong-listed stocks since their peak in February 2021 is now on a par with the losses suffered during the 2008 financial crisis, according to Bloomberg data. Concerns that China has become “uninvestable” – which intensified last year following Beijing’s sweeping regulatory crackdown
– have become more acute
among international investors.
According to Robin Brooks, chief economist at the Institute of International Finance, markets are “looking at China in a new light”. The combination of escalating geopolitical tensions, deep misgivings about Xi’s “ common prosperity
” agenda, the festering crisis
in the housing market and, crucially, the disruptive “dynamic zero-Covid” policy
has caused significant damage to the two main underpinnings of the investment case for Chinese assets: stability and growth.
The key question is whether the loss of confidence in China’s economy and markets marks a sea change in global asset allocation, one that will lead to heavier and more prolonged outflows of capital
. Put simply, have foreign investors given up on China?
While sentiment has not been this bleak in years and could deteriorate further, several factors are working in China’s favour.
First, it is not just China that is unsettling markets, it is the entire global economy. The rally that was triggered by massive stimulus programmes the world over following the eruption of the Covid-19 pandemic has turned into an all-embracing sell-off, with very few asset classes spared.
International fund managers are far more concerned about persistently high consumer price inflation
and aggressive monetary tightening
by leading central banks – two major threats that do not apply to China. The last time China’s economy figured among the top risks to markets in Bank of America’s monthly fund manager survey was back in 2016.
While one can debate whether foreign investors should be more concerned about the severe problems facing the world’s second-largest economy, the fact remains that global sentiment is being driven almost entirely by the actions of the US Federal Reserve
. However dire things look in China’s markets, the damage would be much greater if China itself was the main source of anxiety.
Second, policy signals are more consequential in an opaque and difficult-to-read market like China. There is more scope for a meaningful and potentially durable rally because of Beijing’s ability to move markets sharply if it believes it is in its interest to do so.
That mere rumours about a government plan to reopen the economy
were enough to spark a fierce rally in Chinese stocks earlier this week is an indication of the effect an official announcement on relaxing restrictions would have on asset prices. Any sign that China is making progress on vaccinating its vulnerable population – a prerequisite
for putting an end to growth-sapping lockdowns
– would go a long way towards improving sentiment.
Hints of a more conciliatory policy stance towards the country’s all-important technology sector would also help restore confidence, especially at a time when US tech stocks are under severe strain mainly because of sharp rises in borrowing costs.
Third, although sentiment towards China has deteriorated dramatically
, some Wall Street banks are looking for reasons to take a more positive view of Chinese assets. Tellingly, China and Hong Kong were at the top of investors’ country allocation list for the Asia-Pacific region (excluding Japan) for the next year, according to the results of Bank of America’s inaugural Asia fund manager survey published on October 18.
This is mainly because of Chinese stocks
’ historically low valuations. At the end of last week, mainland shares listed in Hong Kong were trading at a record low 0.5 times book value, according to Bloomberg data. As far as entry points for investors go, this could not be more enticing as long as sentiment improves.
To be sure, there is no reason to be outright bullish about China right now. But if Beijing sends the right signals, especially when it comes to managing the virus, investors could be handsomely rewarded even if the structural problems plaguing China’s economy persist.
Nicholas Spiro is a partner at Lauressa Advisory