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‘Uninvestable’: China’s $2tn stock rout leaves investors scarred

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Chinese authorities’ promise of “forceful” measures last week was their most vocal attempt yet to halt a stock market sell-off that has wiped out almost $2tn in value. For many investors at a Goldman Sachs conference in Hong Kong, that vow was too little, too late.

More than 40 per cent of those surveyed while attending a session on Chinese equities held by the US bank on Wednesday said they believed the country was “uninvestable”. That came just a day after the country’s vice-premier openly called for “more forceful and effective measures to stabilise the market and boost confidence”.

“That many people in Hong Kong voting no [on Chinese equities] is pretty high relative to the constructive home team baseline you typically find,” said Timothy Moe, chief Asia-Pacific equity strategist at Goldman Sachs, adding that the poll results were “emblematic” of the difficulties facing China’s stock market.

Traders, asset managers and hedge funds told the Financial Times that after a decade of steady foreign inflows to Chinese markets, global investor confidence had been shaken by three years of grinding losses, relieved only by fleeting rallies that quickly fizzled out.

This aversion to China stocks among global investors has become more entrenched over the past 12 months thanks to lacklustre economic growth, an unresolved property sector crisis, underwhelming government support for markets and fraying diplomatic relations between Beijing and Washington.

As a result, the benchmark MSCI China stock index is now down more than 60 per cent from its peak of early 2021, reflecting a loss of more than $1.9tn in market capitalisation over that period.

“The global investors we spoke to are by and large out of China,” said Goldman’s Moe. “It’s 3 per cent of your benchmark [index] but can take up 10 per cent of your time . . . and if there’s a rally you can go back in [later]”.

That is a stark contrast to attitudes towards China from just a few years ago, when foreign investors feared they would miss out on the country’s rapid economic growth and domestic consumption turbocharged by rapidly expanding ecommerce platforms.

Now, investors describe a status quo where President Xi Jinping’s focus on stability and national security has cowed once-thriving technology groups and accelerated a financial decoupling from the US. Meanwhile, efforts to transition away from real estate-dependent growth have weighed on the economy, dragging down earnings and the shares of listed companies.

However, the stock market rout has pushed valuations low enough that some Wall Street banks are calling for investors to jump back in. JPMorgan has forecast the MSCI China index — which has already dropped around 10 per cent so far this year — will finish the year at 66. That implies a rise of more than 30 per cent from the benchmark’s closing level on Friday.

But offshore investors trading Chinese equities through Hong Kong’s stock connect programme have continued to dump Shanghai- and Shenzhen-listed stocks, as evidenced by net sales of Rmb11.8bn last month. That marked the first time foreign investors had been net sellers of Chinese equities during the opening month of the year since the scheme began in 2014.

Global asset managers said that it would take more than just low valuations to justify the effort needed for them to start bargain-hunting in mainland markets.

“There’s been a dearth of foreign interest for a long time, and nothing has changed,” said the head of Asia Pacific at one large UK asset manager. “China is quite cheap, but with lots of caveats all the same.”

However, a small cohort of investors have begun to show interest, said traders in Hong Kong, adding that hedge funds eager to ride any recovery rally had built up indirect exposure through options contracts in recent weeks.

Even after the rout, China still forms about a quarter of the MSCI Emerging Markets index, making it hard for investors using the benchmark to ignore. Still, some investors who screen out this Chinese weighting are beginning to take note of stock valuations.

“Is China cheap, is China unloved? Yes,” said one emerging market portfolio manager. Even in a strategy that does away with benchmark exposure to China, he said, “you can have a discrete allocation” to Chinese stocks, which are now trading at a significant discount to other emerging markets or the US.

Yet many foreign investors remain concerned over risks such as the potential for a US-China conflict in the Taiwan Strait, or more aggressive foreign policy from Washington should Donald Trump secure another term as US president later this year.

These risks, they fear, could easily derail a rally in Chinese markets.

George Livadas, manager of Upslope Capital, a Colorado-based hedge fund, said many peers were hoping to buy Chinese stocks at the bottom, given current prices, but argued they had failed to understand how much US-China relations have changed in recent years.

“People will talk about everything except what I think is the obvious headwind,” he said. “It is not just some small disagreement [between the two superpowers]. It is a potential serious risk.”

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