MNI: China Stocks Need Covid Clarity, Business Friendly Policy

China’s new leadership team should provide greater clarity on the role of private enterprise and relax Covid measures to restore confidence in Chinese stocks and curb the capital outflows that recently pushed shares to multi-year lows, advisers and analysts said.

Growing expectations of a relaxation of China’s Covid policies have powered a modest rally in A-shares, and the recent heavy bout of selling led by overseas investors is near the end, said Zhao Jian, head of the Atlantis Research Institute. He believes strict Covid controls, a big bugbear for investors, seem to be approaching a turning point.

Foreign investors have given Chinese stocks the cold shoulder after the Party Congress in October. As of November 8, foreign investors sold a net CNY62.5 billion of mainland shares over the previous 30 days via trading links with Hong Kong, according to data by Hithink Flush Information Network.

Northbound funds – or funds based in Hong Kong that hold mainland A-shares - account for about CNY2.1 trillion in A-shares and foreign holdings account for nearly 10% of the free-float market value of A-shares.

The recent round of net outflows accounted for about 3% of the free float, an eye-catching number but no cause for panic, according to analysts from China International Capital Corporation.

Stocks have rebounded in recent days on hopes for a softening of Covid rules, while some local governments have stopped free testing and epidemiologists have downplayed the threat from the virus.

CLEARER POLICY

Zhao Jian sees a risk that less foreign capital flows into A-shares given the changing environment for listed companies. The market is still waiting for clarity on Beijing’s view on the private economy following last month’s Communist Party congress, where President Xi Jinping secured a historic third term.

Zhao Jian expects there will be a broad reappraisal among investors of prospective profit margins given China’s new leadership has placed “people” at the centre of their development plans.

Industries and companies able to provide local substitutes for foreign goods, or those with state-owned background may enjoy a valuation premium. Globally focused companies or those that are foreign funded may trade at a valuation discount, he said.

TECH WRECKED

Foreign investors who had backed China’s flagship tech companies like Alibaba and Tencent have suffered from Beijing’s crackdown on the platform economy, meaning clarity on this important sector is critical to restoring confidence.

“Internet giants used to offer a large amount of job opportunities, but they are laying off when over 10 million fresh graduates are struggling to get employed this year,” said Zhao Jian, who expects economic and social stability concerns will deliver some policy correction.

To further boost the confidence of foreign investment, regulators should seek to reduce the volatility of A and H-shares, which possibly offer attractive valuations to long-term investors, while also broadening the number of stocks available in the cross-border stock connect schemes, Zhao Jian suggested.

YUAN WORRIES

But any relief from Covid-Zero policies is unlikely to diminish other concerns looming over China’s economy and markets, such as the weak yuan.

“The stock market will still be under pressure should expectations of yuan depreciation and a widening China-U.S. interest spread not change,” said Zhao Xijun, co-president of China Capital Market Research Institute. He expects the Fed to tighten until early 2023. The yuan fell to a 15-year low of 7.32 against the U.S. dollar on November 1.

Elevated U.S. inflation could prevent the Fed from slowing its rate hiking campaign too soon, said Zhao Jian.

Zhao Xijun said China should continue with prudent monetary policy and increase support for the real economy, which will in turn improve listed companies’ profits and dividends.