Is China in crisis?


30 Jan 2024

The world’s second largest economy faces big challenges, but there are also opportunities. Andrew Holt reports.


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The world’s second largest economy faces big challenges, but there are also opportunities. Andrew Holt reports.


January has seen markets in China go into meltdown as confidence in the economy, like magic, suddenly vanished.

The CSI 300 index, which replicates the top 300 stocks on the Shanghai and the Shenzhen exchanges, dramatically fell to a five-year low, while the Hang Seng China Enterprises Index, which tracks Chinese stocks traded in Hong Kong, plummeted to its lowest level in just short of two decades.

But what is behind this and how should institutional investors react?

Economist Mohamed EL-Erian said China faces the risk of two major economic and financial problems.

The first is insufficient domestic growth drivers in the face of external head-winds. The second is long-standing pockets of excessive debt and leverage turning into system-wide detractors of growth, confidence and capital availability.

Opportunity knocks

But with every crisis comes an opportunity. This is the position of Andrew Lapping, chief investment officer at Ranmore Fund Management, who sees the situation as a positive.

“We see the sharp decline in the Chinese market as an opportunity,” he said. “As an investor it is important to take advantage of opportunities when they arise, this is often difficult as the crowd is usually moving in the opposite direction.”

Lapping admitted there are risks in China but, “there are risks everywhere, and it depends on what is in the price”.

Putting the situation into some context, Lapping noted that during the past year the S&P500 is up by more than 20% while the Hand Seng has dropped 30%. “There is no way underlying business values have diverged to this degree,” he said. “This underperformance, particularly over the past month, has given us the opportunity to buy high quality, well capitalised businesses at very low prices – an exciting opportunity.”

Norman Villamin, group strategist at wealth manager Union Bancaire Privée, has taken a different view: exiting China. He noted that investors should be selective when approaching the country, as it is no longer the case of getting into China based on its dramatic growth narrative.

Today, he said, the story of China is more complex as there “are some sectors that are going to have a very hard time”. So investors need “to be more selective in terms of the companies that you buy”.

Jian Shi Cortesi, investment director and fund manager of Asian and Chinese equities at GAM Investments, sees three outcomes to the current situation.

First, investors are pessimistic. Second, pessimism leads to depressed valuations. Third, depressed valuations create opportunities to buy good companies at cheap prices. “If you were a Warren Buffett-type of investor, the current Chinese stock market would make you very excited,” Shi Cortesi said.

Josh Snyder, global investment strategist at GQG Partners, warned that “policy whiplash” initiatives have also stifled investor interest. This, he said: “Is one of the primary drivers of our relatively persistent underweight to China since mid-to-late 2021, where the regulatory whiplash, has tended to have the greatest impact on new economy names thus driving us into more old economy names for what little exposure we maintain.”

Shi Cortesi said that many institutional investors have significantly reduced their weighting to China or now have no exposure to Chinese equities. This, though, could be a flawed approach, she said.

“As Chinese stocks have become cheap and the government has become more and more determined to lift the stock market, underweight positions in Chinese equities could lead to underperformance should China’s stock market start to rally. This is a risk for institutional investors to look out for,” she said.

Given the severity of the events, the government has been forced to act. Bloomberg reported that the Chinese government is considering organising around ¥2trn (£222bn) from the offshore accounts of state firms to buy shares onshore.

Commenting on this, Shi Cortesi said: “The latest indication shows that the government certainly wants the capital market to perform better. We expect to see more national team buying, which historically tended to be around market bottom levels. Companies themselves are also speeding up share buybacks.”

Capital shift

Inevitably, there is something bigger being played out within the China crisis. “Investors have recently witnessed Western capital gradually, but steadily, shift away from China as companies have diversified supply chains and struggled to navigate rising tensions between the world’s two biggest economies,” said Meghan Bruni, investment strategist at Newton Investment Management.

“We believe that studying private-markets data and cross-border capital flows, as well as qualitative evidence, can enhance our understanding of the implications of recent trends,” Bruni added.

But some data can murky the picture. According to official statistics, China’s economy grew by 5.2% in 2023. Yet analysis from data company Rhodium said that with problems in its property sector and high levels of local government debt, actual growth in China during 2023 was closer to 1.5%.

Nevertheless, a mass China investor exodus is unlikely. “We do not believe that companies and investors will completely walk away from China, but a cautious and nuanced approach is war- ranted, with an eye toward diversifying risks,” Bruni said.


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