There’s a silver lining to this year’s $2.5 trillion bloodbath in China’s equity market: foreigners want in.
Buying yuan-denominated shares has rarely been so easy and inexpensive for international investors, according to Bloomberg. The currency is near its weakest in 16 months and hedging against further declines is very cheap. Valuations are 16 per cent lower than when MSCI first added the shares to its indexes only two months ago, while restrictions to access have eased, daily quotas have increased and trading mechanisms have come through testing.
Mainland stocks barely feature in international portfolios, a shortfall that China’s been trying to address for years as it gradually opens its economy. Recent northbound buying shows overseas traders are hunting for value in China after the CSI 300 Index lost as much as 32 per cent in dollar terms since January. That’s increased their ownership of the mainland market to about 5.3 per cent of free float from 2 per cent earlier in the year, according to asset management firm Robeco.
“It’s given the long-term buyers a much better entry point,” said Victoria Mio, the chief China investment officer for Robeco’s Hong Kong unit. “They weren’t caught in the weakness and can afford to be a little less cautious than in January, when everything was expensive. People who were going to enter the market anyway might as well do it now.”
Foreign investors bought a net $3.7 billion of mainland shares since July 25, according to data compiled by Bloomberg based on daily quota usage. MSCI last week listed 10 more A shares it plans to add to its indexes at the end of the month, a change that will lift the weighting of mainland stocks to 0.75 per cent of its emerging-market gauge. While the proportion is still tiny, it’s another step toward attracting some of the $2tn tracking MSCI’s indexes worldwide.
Rival index provider FTSE Russell is slated to announce plans for A shares in September.
There are signs China wants to improve access for foreigners, a move that would broaden the pool of money available to support its languishing stock market. Regulators last week said they’ll ease some trading restrictions facing overseas qualified investors such as insurers, pension funds or sovereign-wealth funds. The announcement triggered a temporary rally in onshore stocks.
Fresh declines in stocks and the yuan mean the valuation case for Chinese shares is stronger than it’s been all year. A gauge of large caps, a group that comprises the majority of foreign buying, trades at only 8.4 times projected earnings, down from a multiple of 12 times in January. Relative to the S&P 500, it’s near the biggest discount in about 15 months.
“Everything has a price,” said Charles Feng, head of macro trading at Standard Chartered in Hong Kong. “At a certain point, people are going to come in and start to pick the bottom. That’s why I wouldn’t be that bearish on everything.”
Luring foreigners comes at a crucial time for China’s equity market as the country’s 142 million day traders, who drive more than 80 per cent of daily turnover, grow increasingly disheartened. But with better known companies in Hong Kong or New York also trading cheap, not all investors see the need to plunge into A shares.
“There’s value everywhere in the China space,” said Andrew Mattock, who helps manage Matthews Asia’s China funds from San Francisco. While he’s been buying H shares after the sell-off, he says he hasn’t increased A-share exposure. “There’s extreme value in Hong Kong and even expensive ADRs are getting interesting.”
Robeco’s Mio, who earlier this year travelled throughout the US, Europe, Australia, and Latin America to pitch A shares to foreign investors, said many refrained from buying because they had only just started researching China’s $5.9tn equity market. CLSA’s Alexious Lee agreed, noting there are about 3,600 companies trading on China’s main boards in Shanghai and Shenzhen. That’s more than those listed in London or Hong Kong.
“Overseas investors need time to understand the market, get to know the companies and be confident enough to position themselves beyond the top 15 stocks,” said Mr Lee, head of China capital access at CLSA. “Now is a great moment to do that.”
While foreign investors survey the scene in the world's second-biggest economy, China revealed it almost quadrupled the value of fixed-asset investment projects approved in July as Beijing looks to accelerate infrastructure spending to boost the cooling economy.
China gave the green light to 17 fixed-asset investment projects in July, worth a combined 77.69bn yuan (Dh41.27bn), Zhao Chenxin, an official at the National Development and Reform Commision (NDRC), said this month.
That compared with approvals for 20.8bn yuan of spending in June, Reuters calculated from official data.
Beijing is accelerating infrastructure spending and rolling out other support measures for businesses to cushion the economy as it braces for the impact of escalating US trade tariffs. Data last week showed China's investment growth has slowed to a record low and consumers are turning cautious on spending.
The NDRC also said that 1.73tn yuan worth of debt-to-equity swap agreements had been signed as of end-July, although only 352bn yuan has been transacted.
Beijing has encouraged highly indebted firms to enter into such agreements as part of its sweeping, multi-year campaign to reduce risks in the financial system and a mountain of debt.
But some China watchers are now questioning whether the stream of new stimulus measures and easier credit has put Beijing's debt reduction efforts on the back burner again.
Under debt-to-equity swap schemes, investors get equity stakes in firms and in exchange the firms are able to lower their debt burden, though the specifics of each deal are different and often complex.
When asked by Reuters if the deleveraging campaign has hurt the economy, as suggested by the weak July data, NDRC official Chen Hongwan said the twin goals of sustainable economic growth and debt reduction were not mutually exclusive.
"We can't just simply say deleveraging is at odds with economic growth," he said, adding that moves such as forcing "zombie" firms to close were good for the economy and healthier companies in the long run.
However, many deeply troubled companies are state owned with many employees, raising the risk of layoffs.
While announcements of big projects are starting to come thick and fast, analysts caution they have long lead times and they may not begin to arrest the decline in China's economic growth until next year.
"The key headwinds were the same as before – slowing investment (especially infrastructure) and an ongoing unwind of shadow credit due to deleveraging measures," analysts from UBS Chin awrote in a recent note, referring to a crackdown on riskier lending which is shutting down an important source of funds for small, private companies.
Despite the eye-catching road and rail spending, economists at Nomura believe Beijing is so far proceeding more cautiously with stimulus than in past downturns.
The government is most likely saving its policy ammunition for September and the fourth quarter, after more sweeping US tariffs take effect, Nomura said in a note this week.