The performance of China’s financial markets has provided some interesting and occasionally conflicting insights in recent days.
After the widespread media coverage of protests in China, equity markets opened sharply down this week. The Hang Seng China Enterprises Index (effectively offshore-listed H-shares) fell by 4.5% in the first minutes of trading on Monday 28 November.1
The initial assumption was that the protests – seen in response to the government’s zero-Covid policy – would lead to further lockdowns, putting additional pressure on the already weak macro environment.
But following those first few minutes, it has been one-way traffic this week. China equities have rallied hard, extending gains from earlier in the month.
The MSCI China Index rose by almost 30% in November and the MSCI China A Onshore index was up 11% (both USD).2
Chart 1: MSCI China A Onshore and MSCI China performance – 3 months (USD, rebased to 100)
Source: Bloomberg, as at November 30, 2022
Given the pace of the rally, to some extent this likely reflects technical factors – short covering, light positioning in China, and the FOMO effect for “hot money”.
But all the same, the market moves also reflect what look to be significant changes in two key areas – Covid policies and property.
On Covid, instead of expectations of a harsher clampdown, a steady trickle of news this week has strongly suggested that, to all intents and purposes, China is actually on a path of de facto opening up.
Beijing authorities, for example, announced that some people would be able to isolate at home, starting with residents of its most populous district – a significant shift in dialling back a nationwide policy that has previously seen everyone with Covid sent to government quarantine sites regardless of severity.
The tone of coverage in China’s media has also changed – the official wording now is “optimisation” of Covid policies, which among other things involves changing the narrative to play down the risks of Covid and playing up the need for vaccination, especially among the elderly.
What is, above all, especially notable is how policies are being eased despite Covid cases in China running at their highest levels since the initial outbreak (and above the levels during the peak of the Shanghai lockdown).3
Chart 2: Daily new Covid-19 cases in Mainland China
Source: Wind, Allianz Global Investors, as at November 30, 2022
The opening up is likely to be bumpy. Different local governments will interpret the “optimised” strategy in different ways. But looking beyond this, there is a growing likelihood that the zero-Covid policy will end within the next few months.
Reflecting this, the beneficiaries of reopening have been leading the equity markets – online travel portals, duty-free store operators, restaurants, airlines and so on.
The other area of strength has been property. The CSI Real Estate Index (ie, listed China A-share developers) rallied by 31% in November and – remarkably given the environment – is almost flat year to date (local currency).4
The catalyst has been a decisive shift in policy following the Party Congress to ease the funding pressures of cash-strapped developers. The China securities regulator joined in this week by lifting a multi-year ban on equity raising by A-share and HK-listed H-share property companies.
We interpret this as more of a risk management exercise, with the main purpose being to facilitate the completion of already pre-sold homes – we still view property as a sector in gradual but structural decline, especially given demographic changes.
But nonetheless, by easing the acute financial stress and starting the process of rebuilding confidence (as well as homes), this also removes one of the obstacles to a macro recovery.
In summary, we see recent policy news as meaningfully increasing the probability that 2023 will see an acceleration of economic growth. This will feed through into corporate earnings, especially in the second half of next year.
Against a backdrop of reasonable absolute and relative valuations (MSCI China 10.4x, MSCI China A Onshore 12.0x forward PE),5 we see reasons to be more optimistic on the return outlook for China equities in the year ahead.
1 Source: Bloomberg
2 Source: Bloomberg, 1 December 2022
3 Source: China National Health Commission, 30 November 2022
4 Source: Bloomberg, 30 November 2022
5 Source: Bloomberg, 30 November 2022
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 4 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)