The latest global market volatility has reinforced China’s status as a bellwether market, even as its growth has slowed recently. While U.S. technology stocks have fallen and Japanese stocks have swung wildly in a historic two-day period of price action, Chinese stocks have suffered less. By the end of the Asian trading week on Friday, before the U.S. market opened, the Nasdaq 100 and the Nikkei 225 had fallen about 2.5% over the past five trading days, according to Wind Information. By contrast, the Shanghai Composite Index was down 1.5% and the MSCI China Index was up 0.2%. Hong Kong’s Hang Seng Index rose 0.9%. “If the volatility in the U.S. and other developed markets continues, people will look elsewhere to generate returns,” Matt Wachter, chief investment officer for Asia-Pacific at Morningstar Investment Management, said in a phone interview on Friday. “We think fundamentals will eventually win out and capital will return to some companies in China because it’s a very attractive investment opportunity that you can’t miss.” Fund flow data from EPFR showed that international investors significantly increased their purchases of Chinese stocks on Monday, Aug. 5, before reducing their holdings the following day. The data showed that investors remained net buyers of Chinese stocks for the third quarter through Aug. 6. “We believe there are reasons for international investors to reallocate some allocations back to the Chinese equity market after being relatively light,” William Yuen, chief investment officer at Invesco, said in an emailed statement on Friday. “Chinese equity valuations are near historic lows and the stock market is broad and deep enough for investors to look for growth opportunities,” he added. “The economy has also shown signs of stabilization, with policy easing measures taking effect. Finally, the low correlation between the Chinese stock market and the U.S. stock market could provide investors with diversification benefits.” Chinese stocks, especially those traded on the mainland, have historically been less correlated with global market movements due to Beijing’s capital controls and other restrictions. International investors without operations in China have gradually been able to access some mainland stocks, called A-shares, through stock-link programs via Hong Kong. However, HSBC analysts noted in an Aug. 6 report that “foreign long-term funds and hedge funds have been actively selling” A-shares this year. That left net inflows from both types of funds at 13 billion yuan ($1.81 billion) for the year through Aug. 2, the report said. On the flip side, semiconductor firm Montage Technology and state-owned train company CRRC — both listed in Shanghai — led net inflows during that time, according to HSBC. Both stocks have fallen over the past five trading days. The latest global market volatility has partly spurred the unwinding of the yen carry trade, following the Bank of Japan’s interest rate hikes and growing expectations of a U.S. rate cut. The carry trade is a practice in which investors borrow money in a currency from a country with low interest rates and invest in currencies with higher returns. Investors then profit from the price differential, but they could lose money if that changes suddenly. The disturbing U.S. jobs report on Aug. 2 helped fuel expectations that the Federal Reserve will raise interest rates on the U.S. dollar. The Fed will soon cut rates, changing assumptions about how much certain assets will return compared to others. Investors have had no difficulty choosing where to put most of their money when the yield on the 10-year Treasury note traded above 4% — versus 2.17% for its Chinese counterpart. HSBC’s multi-asset team expects the stock market selloff triggered by the yen’s unwinding to last a month. If the Fed cuts rates, it could help the case for Chinese stocks, Stephen Sun, head of research at HSBC Qianhai Securities, and the team said in an Aug. 6 report. Analysts said a rate cut in the U.S. meant the People’s Bank of China could ease monetary policy further, “which is crucial for the recovery of China’s emerging property market.” They added that a weaker US dollar makes the Chinese yuan more attractive to foreign inflows, while lower US interest rates are generally positive for emerging markets such as China. The latest trade and inflation data from China in the past few days have suggested that domestic demand is holding up, although the economy is not necessarily firing on all cylinders. The National Bureau of Statistics is due to release additional data for July on Thursday, which will be key to retail sales after they grew just 2% in June. However, global institutions’ caution on Chinese stocks is unlikely to change quickly. “Investors still favor U.S. financial markets over China,” Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, said in an email. “Times of economic stress tend to favor U.S. markets, even when the U.S. is the source of stress. We think this is because the U.S. economy is more diversified than export-oriented economies (such as China). “The real problem with China’s investment outlook is not the current market volatility, but the ongoing weakness of the Chinese economy and the disappointing policy response so far,” he said. “Deflation is the central issue.” He noted that the Third Plenary Meeting last month focused on “resilience to external shocks” rather than a host of domestic issues. Chinese stocks have struggled to recover amid gloomy sentiment over the property market and other economic challenges since the Covid-19 pandemic. Hong Kong’s Hang Seng Index is clinging to gains this year so far — after a record four-year losing streak. “I think what I’ve seen over the last few days is that some of these names, Alibaba, “Tencent has weathered this global volatility well,” he said. “I think that’s because they’re already reasonably priced from a valuation perspective. Alibaba still has a very good management team, similar to Tencent,” he said, pointing to efforts that align with investor interests in balance sheets and cost reductions. “We think they’re focusing internally on consumption in China, and consumption in China will shift,” he added. “They’re going to generate most of their revenue inside China, less exposed to the trade wars and the quirks that happen in the global economy. It’s a compelling opportunity from that perspective.”
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Chinese stocks have weathered much of the recent sell-off.
