Indeed, from the high point on 27 January, the offshore MSCI China Index has fallen by 15%. China Ashares have been more resilient – with the MSCI China A Onshore Index returning -6% over the same period (USD).1
Nonetheless, it’s surprising given everything that has happened in China to see offshore equity market returns ahead of the S&P 500 over the last year, and China A-shares around the same level.2
Chart 1: Historical correlation between major equity markets
Source: Bloomberg, Allianz Global Investors, as of February 28, 2023. Correlation data is calculated based on historical return ofrespective MSCI indices for the past 10 years, using weekly USD returns.
The recent relative weakness of offshore markets highlights how they are more sensitive to global events, including geopolitics as well as the tremors testing the US and European banking systems.
Indeed, the correlation of Hong Kong-listed China stocks with global equities is 0.52, while the equivalent figure for China A-shares is only 0.283 (based on historical returns of MSCI indices for the past 10 years). In other words, China A-Shares and global equities only move in the same direction 28% of the time.
The focus on Californian and Swiss banks in recent days has, to a certain extent, obscured some interesting developments in China.
The growth target of "around 5%” set at the National People’s Congress4 , and a lack of accompanying policy detail, clearly disappointed the market.
Our view is to interpret this more as a floor than a target. It is rare for China to miss growth forecasts. It happened in 2022 due to Covid and there will be determination to make sure this is not repeated.
Chart 2: MSCI China, MSCI China A Onshore, S&P 500 – total return over 1 year (USD, rebased to 100)
Source: Bloomberg as at 15 March 2023
Indeed, recent economic data suggests the economy is bouncing back from its trough in December/January.
February credit growth jumped to 9.9% year-on-year5 as banks continue to follow instructions to step up lending and front-load loans at the beginning of the year.
Covid is clearly behind China now as subway passenger turnover has returned to pre-pandemic levels, restaurant sales are rebounding and box-office revenue is back in positive territory (it was down 35% in 2022).6
The housing market is also showing some green shoots. New home sales in January and February combined are down only 3.6% year-on-year compared to -31.5% in December.7
While the challenging global environment will no doubt have some dampening effect on the pace of recovery in China, nonetheless we continue to expect improving news flow in coming months. And this should also support a decent recovery in corporate earnings.
Over the longer term, it may well be that the institutional and personnel changes announced recently come to be seen as more important to the economy and markets than the growth target.
In a surprise move, the People’s Bank of China (PBOC) Governor (Yi Gang) and Minister of Finance (Liu Kun) remain in place, a pointer to policy continuity in the face of economic uncertainties.
The decision to make the China Securities Regulatory Commission (CSRC) administratively more important as a “government agency” is also notable.
This reflects the growing strategic importance of domestic capital markets – both in terms of companies’ ability to access funding (especially private enterprises), and also in terms of further improving market infrastructure to attract more foreign investment.
These are also the drivers of two recent policy announcements. First, increasing the number of stocks eligible through the Stock Connect scheme (an investment channel connecting the Hong Kong, Shanghai and Shenzhen stock exchanges), which now covers around 90% of the total market capitalisation and 80% of average daily trading volume in China A-shares.8
And second, a change to the initial public offering (IPO) mechanism. Going forward this will be based on a US-style model, which should remove a lot of the current restrictions and speed up the time to market.
A final point of note was the first press conference of new Premier Li Qiang, effectively now the number two to President Xi Jinping. His comments were notably market friendly, with a focus on growth as a top priority and an understanding of how important the private sector is to China’s economy.
It was an encouraging start and helps to set the tone for future policy direction.
1 Source: Bloomberg ,15 March 2023
2 Source: Bloomberg ,15 March 2023
3 Source: Bloomberg, 28 February 2023. Correlation data is calculated based on historical return of respective MSCI indices for the past 10 years, using weekly USD return
4 Source: China sets modest growth target of about 5% as parliament opens | Reuters, Reuters, 5 March 2023
5 Source: Macquarie, 15 March 2023
6 Source: Macquarie, 15 March 2023
7 Source: Nomura, 15 March 2023
8 Source: Morgan Stanley, 6 March 2023
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