Recent volatility in the global market has reinforced China’s status as a distinct market, even if its growth has slowed recently. While U.S. tech stocks fell and Japanese stocks fluctuated wildly in a historic two days of price action, Chinese stocks suffered less. By the end of the Asia trading week on Friday, before U.S. markets opened, the Nasdaq 100 and Nikkei 225 were both down about 2.5% over the past five trading days, according to Wind Information. In contrast, the Shanghai Composite fell 1.5% and the MSCI China Index rose 0.2%. Hong Kong’s Hang Seng Index rose 0.9%. “If volatility continues in the U.S. and other developed markets, people are going to look elsewhere to earn returns,” Matt Wachter, Asia-Pacific chief investment officer at Morningstar Investment Management, said in a phone interview Friday. “We think fundamentals will prevail in the end and capital will return to some of China’s companies because they remain very attractive investment opportunities,” he said. Fund flow data from the EPFR showed international investors significantly increased their purchases of Chinese stocks on Monday, Aug. 5, before cutting back on holdings the next day. The data showed investors remained net buyers of Chinese stocks for the third quarter through Aug. 6. “We believe international investors have reasons to look toward redeploying some allocation to the China equity market after relatively short positioning,” William Yuen, Invesco’s investment director, said in an emailed statement Friday. “Valuations of Chinese equities remain near historic lows and the stock market is broad and deep enough to enable investors to seek growth opportunities,” he added. “The economy has also shown signs of stabilizing, as policy easing measures take effect. Finally, China’s stock market’s low correlation with the U.S. stock market may provide investors with diversification benefits.” Chinese stocks, particularly those traded on the mainland, have historically been less correlated to global market moves 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-connect programs through Hong Kong. However, “foreign long-only funds and hedge funds have been actively selling A shares” this year, HSBC analysts noted in an Aug. 6 report. Net inflows from both fund types totaled 13 billion yuan ($1.81 billion) this year through Aug. 2, the report said. On the other hand, semiconductor company Montage Technology and state-owned train company CRRC – both listed in Shanghai – led net inflows during that time, according to HSBC. Both stocks have declined in the past five trading days. The latest volatility in global markets was driven partly by the closure of the Japanese yen carry trade following a Bank of Japan rate hike and rising expectations for 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 higher-yielding currencies. Investors then profit from the difference in rates, but they can lose money if it changes suddenly. A worrying U.S. jobs report on Aug. 2 boosted expectations that the Federal Reserve would soon cut interest rates, changing perceptions of how much return some assets can offer compared to others. It has not been difficult for investors to choose where to put most of their money, when the 10-year Treasury yield is trading above 4% — compared to 2.17% for the Chinese equivalent. HSBC’s multi-asset team expects that ending the Japanese yen carry trade could lead to a month-long stock market sell-off. If the Fed cuts rates, it could help the case for Chinese stocks, HSBC Qianhai Securities head of research Steven Sun and a team said in an Aug. 6 report. Analysts said a U.S. rate cut would mean the People’s Bank of China could ease its monetary policy further, “which is crucial for the recovery of China’s nascent property market.” They added that a weaker U.S. dollar makes the Chinese yuan more attractive to foreign inflows, while a U.S. rate cut is generally positive for emerging markets like China. China’s latest trade and inflation data released over the past several days indicate domestic demand remains strong, though the economy is not necessarily running on all cylinders. The National Bureau of Statistics is scheduled to release additional data for July on Thursday, with retail sales being important to watch as it rose only 2% in June. However, global institutions’ caution on Chinese stocks is unlikely to change quickly. “Investors should still prioritize the U.S. over Chinese financial markets,” Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, said in an email. “Times of economic stress generally favor U.S. markets, even if the U.S. is the source of the stress. We believe this is because the U.S. economy is more diversified than export-oriented economies (as China’s economy still is).” “The real problem with China’s investment landscape is not the current market volatility, but the ongoing weakness of the Chinese economy and the disappointing policy response so far,” he said. “Inflation is the central problem.” He added that last month’s “third plenary meeting” focused on “resilience to external shocks” rather than a range of domestic problems. Chinese stocks have struggled to make a comeback since the COVID-19 pandemic hit amid gloomy sentiment about the asset market and other economic challenges at large. Hong Kong’s Hang Seng index is up year to date after recording four straight losses. “I think what you’ve seen over the last couple of days is that some names like Alibaba, Tencent have held up quite well despite global volatility,” Morningstar’s Wachter said. “I think it’s because they’re already priced quite reasonably from a valuation perspective, there’s no chance of falling any further.” Tencent, the biggest stock by market capitalization in the Hang Seng Index, and Alibaba’s Hong Kong-listed shares both closed Friday with gains of more than 3% for the week. “In Alibaba’s case, it still has a very good management team, similar to Tencent,” Waechter said, pointing to efforts to shore up balance sheets and cost cuts that align with investor interest. “We think their internal focus is on Chinese consumption, and Chinese consumption will change,” he added. “They’re going to generate most of their revenue within China, which is less sensitive to the ongoing trade wars and shenanigans in the global economy. Attractive opportunity from that perspective.”
Here is a rewritten title within the 60-character limit:
“China’s Stock Market Resilient Amid Recent Sell-Off”
Here is the rewritten content:
China’s Stocks Maintain Strength Amid Global Market Volatility
Recent market fluctuations have highlighted China’s distinct market status, even with slower growth. While US tech stocks declined and Japanese stocks experienced significant fluctuations, Chinese stocks suffered less. By the end of the Asia trading week on Friday, the Nasdaq 100 and Nikkei 225 had fallen 2.5% over five trading days, whereas the Shanghai Composite fell 1.5% and the MSCI China Index rose 0.2%.
"If volatility continues in the US and other developed markets, investors will look elsewhere to earn returns," said Matt Wachter, Morningstar Investment Management’s Asia-Pacific chief investment officer. "We believe fundamentals will prevail, and capital will return to Chinese companies due to their attractive investment opportunities."
International investors have been increasing their purchases of Chinese stocks, with data from EPFR showing significant inflows on Monday, August 5, before reducing holdings the next day. International investors remained net buyers of Chinese stocks for the third quarter through August 6.
William Yuen, Invesco’s investment director, stated, "We believe international investors have reasons to redeploy some allocation to the China equity market after relatively short positioning. Valuations of Chinese equities remain near historic lows, and the stock market is broad and deep enough to enable investors to seek growth opportunities."
Chinese stocks, particularly those listed on the mainland, have historically been less correlated with global market moves due to Beijing’s capital controls and other restrictions. International investors have gradually gained access to mainland stocks through stock-connect programs in Hong Kong.
However, foreign long-only funds and hedge funds have been actively selling A shares this year, with net inflows totaling 13 billion yuan ($1.81 billion) through August 2, according to HSBC analysts. On the other hand, semiconductor company Montage Technology and state-owned train company CRRC, both listed in Shanghai, led net inflows during that time.
The recent volatility in global markets was driven partly by the closure of the Japanese yen carry trade following a Bank of Japan rate hike and rising expectations for a US rate cut. A worrying US jobs report boosted expectations for a Federal Reserve rate cut, leading to a change in perceptions of investment opportunities.
HSBC’s multi-asset team expects a month-long stock market sell-off if the Japanese yen carry trade closes. If the Fed cuts rates, it could benefit Chinese stocks, HSBC analysts said.
China’s latest trade and inflation data indicate domestic demand remains strong, although the economy is not necessarily running at full capacity. The National Bureau of Statistics will release additional data for July on Thursday, with retail sales being an important indicator to watch.
Despite global institutions’ caution on Chinese stocks, analysts believe investors should prioritize the US over China due to the US economy’s diversification and export-oriented nature.
"The real problem with China’s investment landscape is not the current market volatility, but the ongoing weakness of the Chinese economy and the disappointing policy response so far," said Paul Christopher, Wells Fargo Investment Institute’s head of global investment strategy. "Inflation is the central problem."
