Chinese stocks just capped its most tumultuous week in decades. After plunging to historic lows on delisting fears, China’s stock market enjoyed their biggest two-day advance since 1998 after the government pledged to keep markets stable and support overseas share listings.
Shares of tech giants Alibaba, Tencent, and JD.com surged more than 30% last Wednesday while the KraneShares CSI China Internet ETF (KWEB) soared 40%. KWEB holds stocks of Chinese Internet companies such as Tencent, Alibaba, JD.com, Baidu and more.
Before last week’s bounce, Alibaba had lost 65% of its market value in the past year alone. The stock had sunk lower as China’s stock market faced additional selling pressure from rapidly rising COVID-19 cases and fears of potential sanctions should China provide support to Russia.
Another trigger was the US Securities and Exchange Commission (SEC) specifically naming five Chinese firms as being at risk of delisting. This resulted in a massive sell-off in Chinese companies’ American depositary receipts (ADRs). ADRs allow non-US companies to trade on American exchanges.
What sparked the massive rally?
So what happened? China’s Vice Premier Liu He (the third highest ranking CCP member) gave a speech that revealed many pieces of good news including:
- China’s regulatory authorities will work with their US counterparts and arrive at a cooperation plan for US-listed Chinese stocks
- China continues to support various kinds of overseas listings
- Regulation of internet platform companies should be “standard, transparent, and predictable” and “be completed as soon as possible”
- China must take actions to bolster the economy, with monetary policy taking the lead
This statement addressed many concerns about the forced delistings of Chinese companies, the possibility of new US IPOs for Chinese firms, Beijing’s tech crackdown, and whether the Chinese government will introduce stimulus or other supportive policies.
Naturally, stocks soared after the good news was announced!
What happens now
Chinese stocks have since pared back some of their advances as investors wait for China to deliver concrete follow-throughs. Despite last week’s massive rebound, China is still among the worst performing major markets in Asia.
It remains to be seen if China’s announcement is just empty rhetoric, or a fundamental shift in the country’s approach to regulating its financial markets.
Is China still a good investment?
With optimism creeping back, is it time to buy China stocks? There are two camps.
JPMorgan recently said they consider Chinese Internet stocks to be “uninvestable” for the next six to 12 months, citing rising macro and geopolitical risks. They also downgraded 28 of the stocks they cover.
StashAway just slashed their China allocation. They believe the threat of secondary sanctions due to China’s stance on the Ukraine war is serious and unpredictable.
Skeptics think this latest episode proves just how unstable China’s stock market is. Share prices are highly dependent on China’s politics and regulatory environment, and less on fundamentals. Should President Xi Jinping change his mind about supporting the stock market, valuations could again plunge. In a way, this makes Chinese companies more risky than firms that can be valued largely on their earnings and underlying businesses.
On the other hand, some financial firms think the sell-off is over. HSBC and China International Capital Corporation (CICC) have become optimistic given China’s softened regulatory stance.
“The phase of rapid declines may already be over and the market may move into a pattern of consolidation, with shrinking turnovers,” CICC said in a recent report. “While the market will still face twists and turns amid uncertainty such as geopolitics, stagflation, the pandemic and China-US relations, opportunities override risks in the long-term point of view.”
Another potential positive is that valuations for Chinese stocks are extremely cheap right now. According to Bloomberg data, the CSI 30 Index (measuring mainland China’s 30 largest stocks) trades 15.6 times earnings while the Hang Seng Tech Index (holding tech stocks like Alibaba and Tencent) is valued near historic lows of 10.8 times.
Should more accommodative policies materialise, Chinese stocks could rally further. More good news could also be announced in the run up to the 20th CCP congress in November. Historically, Chinese stocks tend to do well ahead of this event.
What I think
If, like me, you’re still holding on to your Chinese stocks, I see the recent rebound as a sign that maybe it’s time to average down.
My view is that it’s not in the interest of the CCP to let the stock market tank for a prolonged period. Many Chinese have wealth in the China stock market; persistently falling valuations go against the goal of “common prosperity” that President Xi Jinping keeps emphasising.
Regulatory moves within China’s stock market are also not that uncommon. In fact, Chinese stocks experience a bear market almost every year, largely due to regulatory shifts. Even so, investors have historically been rewarded for this volatility. Over the past 20 years, the MSCI China Index has generated an annualised total return of 12.3% as compared to the 9.3% produced by the S&P 500.
While it’s impossible to predict the actions of Chinese policymakers going forward, I’m optimistic that the worst is over for Chinese stocks. Granted, it will take time for the market to rebuild confidence, but the broader recovery story is hard to overlook.
For this reason, I’ll be holding on to my Alibaba and JD.com stocks, which I bought in early 2021 and have held through the pain of seeing half its value evaporate.
Global diversification is also not a bad idea. My Syfe Core Equity100 portfolio has made a slight gain over the past month. About 13% of the portfolio is allocated to China, and the rest in US, Japan, UK etc.
As Syfe explained in a client note, the Equity100 portfolio gained about 5% overnight last week due to upbeat market sentiment.
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This article is for informational purposes only and does not constitute financial advice. Please do your due diligence before making any investments.
The Frugal Fox 