Given everything that has happened this year, it is notable how similar the year-to-date performance of China equities has been compared to other major indices, in local currency terms at least.
MSCI China A Onshore and the S&P 500 have both returned around -21% and MSCI Europe -17% (as at 28 September).1
However, this YTD figure masks a topsy-turvy year for China A-shares with a Q2 bounce giving way to a weak Q3.
As usual, the key driver of China A-shares has been domestic economic conditions – which, after all, have the greatest influence on domestic retail investors who dominate market turnover.
Chart 1: YTD performance of China A shares and global equity markets (local currency)
MSCI China A Onshore
Source: Bloomberg, as at September 28, 2022.
And the recent weak period for the market coincides with disappointing macro performance.
The two biggest factors weighing on economic activity are the housing market and Covid policies. What happens next with both of these will likely shape the near-term performance of the equity market.
So far, there has been more policy action on the property side.
While the usual mantra in housing is “location, location, location”, it’s more like “credit, credit, credit” in China at the moment. The way the system works is that homebuyers put in their money upfront and move into their new home after it has been built. In short, they run significant credit risk.
It’s no surprise, therefore, that buyers are turning increasingly to large, state-owned developers that can survive the downturn. Likewise, banks are set to favour these developers when extending mortgages to buyers.
Government policy in property is designed to do “just enough” and avoid repeating mistakes of the past, when “big bang” stimulus resulted in high debt levels and overbuilding. We expect further policies to ensure a stabilisation in the market, most likely coming after the Party Congress to be held in mid-October.
More broadly, property is a sector that looks to be in a period of gradual but sustained long-term decline, mainly due to demographic trends. And therefore, the main focus of policies to stimulate the economy is more likely to be in new growth sectors – semiconductor equipment, renewable energy, higher-tech manufacturing and food security, for example.
In our view, it is the tight Covid controls that are playing the bigger role in dampening investor spirits, depressing consumer spending and therefore also contributing to the property downturn.
The much-awaited “China reopening” is only a matter of time. The ongoing ad-hoc lockdowns and frequent testing are unsustainable for growth, social stability and global connectivity.
So far there have been only glimpses of opening up. Hong Kong’s decision to end mandatory hotel quarantine has been well received locally. But the three-day ban on going to restaurants, bars and other facilities is unlikely to tempt many tourists, even with the return of the renowned rugby Sevens (4- 6 November).
Still, the fact that a sporting event with capacity for more than 30,000 spectators is taking place for the first time since 2019, combined with the resumption of package tours from mainland China to Macau, are small steps in the right direction.
And it’s interesting that related stocks such as online travel portals and Macau casino operators have perked up recently, despite the lack of concrete news on changes to Covid policy in mainland China.
Chart 2: YTD relative performance of large online travel portal and Macau gaming company (rebased to 100, HKD)
Source: Bloomberg, Allianz Global Investors as of September 27, 2022
Finally this week, a comment on currencies. The renminbi has depreciated by around 7% vs. the US dollar since the beginning of August.2
The PBOC has been taking action to slow the pace of the depreciation and limiting the extent of the volatility but has not attempted to defend a specific exchange rate level.
The central bank sets a daily fixing for the currency, and daily trading is confined to a band of 2% above and below the fixing. For some weeks now, the PBOC has consistently set the fixing at a stronger level than implied by the previous day’s trading.
There have been other technical measures as well, which have marginally shifted incentives to short the renminbi. For example, a 20% risk reserve ratio has been reimposed on forward contracts. In reality though, this is mainly a signalling effect.
Indeed, the current decline is more a function of US dollar strength against all currencies than a market judgement on China. YTD the renminbi has, in fact, appreciated against sterling, the euro and the yen.3
Nonetheless, the fall in the renminbi vs. the US dollar and the growing interest rate differential between China and the US (China government 10-year bond 2.7%, US 10-year Treasury 3.7%4) has contributed to a reversal in portfolio capital flows.
Foreign investors have been net sellers of China onshore bonds every month since February.5 The impact on equities has been more muted – foreigners have continued to be net buyers YTD, although to a lesser extent than previously.
Chart 3: YTD Renminbi performance compared to Sterling, Euro, Japan Yen (rebased to 100)
Source: Bloomberg, Allianz Global Investors as at September 27, 2022.
1 Source: Bloomberg, as at 28 Sept
2 Source: Bloomberg, as at 28 Sept
3 Source: Bloomberg, as at 28 Sept
4 Source: Bloomberg, as at 28 Sept
5 Source: Gavekal, as at 27 Sept
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Foreign markets may be more volatile, less liquid, less transparent, and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; ; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK)