The Chinese equities, be it the onshore or the offshore equities have tumbled by more than -28% and -25% from their respective peaks since early 2018. Nothing new, but the tightening credit condition on top of the on-going trade dispute between US and China, with both sides imposing tariffs on more than hundred billion worth of goods which have fanned fears about the impact on the global economy. In this article, we will be discussing some of the economic developments in China and why investors should not wait for the “bottom” of the Chinese equities.
|Figure 1: YTD Performance for Chinese Equities
The Slowing Economic Growth Is Expected
Over the past couple of days, investors might have seen some of the news headlines like “China’s economic growth hits nine-year low” or “China growth slowest since financial crisis as trade war looms”. No doubt, China posted the lowest growth rate since 2009 with the country economic activity growing by 6.5% y-o-y in the 3Q2018.
While some journalists were claiming that the slowdown in Chinese economic growth was a result of the continuing US-China trade disputes, the official data was not telling the similar story. For the third quarter of 2018, China recorded strong exports growth of 11.4%, 9.1% and 14.5% on year-on-year basis in July, August and September respectively. On top of that, China’s exports to US grew to a historical high level of $46.7 billion in September, creating a record trade surplus of $34.1 billion with US.
|Figure 2: China's Export Trade in USD Y-o-Y
|Figure 3: China's Exports to US in USD (million)
In our view, we believe that the slowdown in the Chinese economy does not signal any massive issue as what we have mentioned earlier, the Chinese government is now focusing on a higher quality and more sustainable growth. In fact, the 6.5% of growth is considered rather strong given then gigantic size of the China’s economy and it still remains on track to meet the Beijing’s full-year growth target of about 6.5%.
China’s Regulators Restore Market Confidence
Last Friday, just hours before the release of China official data that showed the slower-than-expected growth rate for Chinese economy, three of the top Chinese financial regulators spoke in support of the local market during interviews with media:
Chairman of the People's Bank of China, Yi Gang:
“ The recent stock market volatility is primarily the result of investor expectations and emotions"
“China's economic fundamentals are good, in contrast to the historically low valuations in the stock market”.
China Securities Regulatory Commission Chairman Liu Shiyu:
“We will encourage local government-managed funds, qualified private equity investment funds, broker-managed products or newly organized funds, to help relieve the stock pledge difficulties of public companies with good prospects but are temporarily facing operational difficulties, so they can develop healthily”.
Chairman of the China Banking and Insurance Regulatory Commission, Guo Shuqing:
"Recently, due to various factors, China's financial market has experienced a large number of abnormal fluctuations, which is seriously out of touch with the fundamentals of China's economic development and inconsistent with the overall soundness of China's financial system".
On top of the statements that aimed to restore the investors’ confidence, the respective financial authorities have also proposed a few plans which aim to stabilize the financial market such as allowing WMP (wealth management product) funds to be invested directly into stocks and to scrap the minimum investment requirement of investors in such products.
In addition, the China Banking and Insurance Regulatory Commission is also planning to permit insurers to create specialized products to help resolve liquidation risks from equity-pledged lending while the PBOC is looking into measures that could support private enterprises in bond and equity financing, as well as credit enhancement services for firms that unable to issue such securities.
Meanwhile, the Chinese president Xi Jinping also promised to provide unwavering support to the country's private sector, saying that the words and practices that negate and weaken the private economy are wrong and to support the development of private enterprises is always the Party Central Committee’s consistent policy.
The Cheap Valuation Getting Cheaper
No doubt that uncertainties will always be there in a financial market while an equity market with cheap valuation could get even cheaper and no one can always correctly predict the direction of an equity market. Having said that, if investors invest into a potential market with cheap valuation, they are limiting the downside risk for a higher upside potential and this is exactly what we are seeing in the Chinese equity market right now. The current market valuation for the China’s equity market for both the onshore and offshore markets are suggesting an extremely attractive Chinese equity.
Also, the Chinese corporate earnings are expected to record double digit growth rate over the next couple of years even after experiencing the earnings downward revision over the past few months due to the trade-related issue. Hence, coupled with the current undemanding valuation, the Chinese equities are expected to deliver an annualized return of more than 30% by the end of 2020.
All in all, as mentioned, it would be extremely difficult to predict where would exactly be the peak and bottom of an equity market. However, looking at the current situation of healthy economic backdrop, cheap valuation as well as the supportive regulators, we believe that it will be worth the risk by investing into the Chinese equities due to the limited downside risk.
As such, for investors who share the same view with us, they can consider
CIMB Principal Greater China Equity Fund for mainly H-share exposure or
CIMB Principal China Direct Opportunities Fund for the China A-share exposure.