“Run, rabbit, run” might be an appropriate description of China’s equity markets so far this year. In January, the MSCI China Index rose by 12% and the MSCI China A Onshore by 10%1 .
A notable feature of the recovery, which started at the end of October 2022, has been the strong outperformance of offshore markets. These have risen by over 50% since the low point2 .
One way to view this is through the Hang Seng Stock Connect AH Premium Index, which tracks the price premium (or discount) of A-shares over H-shares for companies that are dual-listed in mainland China and Hong Kong.
Chart 1: Hang Seng Stock Connect China AH Premium Index (3 years)
Source: Bloomberg, Allianz Global Investors as at 1 February 2023
In October 2022, dual-listed A-shares reached the highest premium level vs. H-shares in 15 years3 – a reflection of how weak sentiment in offshore markets became following China’s National Party Congress.
In a matter of weeks, however, the surge in offshore markets has led to the premium falling back close to the lowest levels seen since the start of the pandemic.4
This begs the question – why have global investors been so much more prepared to buy into China equities than domestic investors?
Not only have global investors been buying Hong Kong-listed stocks, they have also actively bought into China A-shares – there was around USD 19 billion of net inflows through Stock Connect in January, which compares to USD 13 billion in the whole of 2022.5
There are a number of factors at play here in our view. Offshore markets had previously been sold down more heavily – especially the internet space – and the growing evidence that regulatory pressure has peaked has prompted significant relief and support for valuations.
In addition, much of the recent buying appears to have come from hedge funds, part of which has been to cover previous short positions.
But over and above this, there also appears to be more of a willingness for global investors to buy into the China recovery story in advance of an actual improvement in economic data or corporate earnings.
Chart 2: Margin trading outstanding balance in China A-Shares (CNY billion)
Source: Wind, Allianz Global Investors, as of 1 February 2023
This has been helped by careful choreography in signalling that China is again open for business – such as Vice Premier Liu He’s widely publicised comments at Davos, and a string of global financial services companies being granted additional licenses to expand their operations in China.
In comparison, domestic retail investors have so far taken more of a “wait and see” approach.
One factor is that the upcoming earnings season will be challenging as it reflects the worst of the economic conditions.
And there is a major political event in March called the “Two Sessions” where China’s top legislature and political advisory bodies hold their annual meetings. This is when the closely-watched 2023 GDP growth target should be announced together with policy details about how the target will be achieved.
A useful real-time domestic sentiment indicator is the level of China margin trading balances (Bloomberg code: CHMDBMT). With domestic investors dominating daily turnover in Shanghai and Shenzhen, a recovery in local animal spirits will be a key input for China A-shares to make significant further headway.
A final point this week is encouraging news on China’s capital market infrastructure. Draft rules have been published on long-awaited plans to reform the cumbersome IPO process.
Under the current system it can take companies one to two years to receive approval for listing and there are strict controls on areas such as capping IPO valuations at a maximum level, minimum historical profitability levels, and limiting daily price moves in the days after listing.
The new proposed system, which is similar to the US-style IPO mechanism, was first adopted by the tech-focused STAR board. The plan is now to expand this to the main boards in Shanghai and Shenzhen.
Combined with other recent news that the Stock Connect schemes will be expanded to include a wider range of companies, this confirms China’s focus on continuing to improve its capital market infrastructure, which is essential for providing the necessary funding for China’s growth ambitions.
1 Source: Bloomberg, 1 February 2023
2 Source: Bloomberg, 1 February 2023
3 Source: Bloomberg, 31 October 2022
4 Source: Bloomberg, 27 January 2023
5 Source: Wind, 1 February 2023
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. 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 4 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 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).