Chinese offshore stocks to turn corner in 2022 even as Xi’s ‘common prosperity’ goal and regulatory scrutiny persist, global funds say

• China may outperform other markets in 2022, Fidelity executive says
• We recognise the regulatory risks, ‘yet see current valuations as offering eligible investors adequate compensation for them’, Blackrock’s chief China economist says

2021 was a tumultuous year for Chinese offshore stocks, amid regulatory action by Beijing that led to deep losses on the Hang Seng Index and US-listed Chinese companies.

But the market could turn a corner in the new year, global funds said.

“China may outperform other markets in 2022, given its easing cycle has already started. Valuations are more reasonable, and there is still low ownership among global investors,” said Jing Ning, portfolio manager for Fidelity’s China Focus Fund in a 2022 outlook note on December 7.

Here is what could lie ahead for investors and markets in 2022.

Common prosperity

Investors will be well aware of President Xi Jinping’s “common prosperity” goal, following a US$5.2 trillion sell-off last year in the MSCI China Index, a gauge of 741 companies with mainland Chinese operations.

Analysts, however, said that the goal was clear and consistent. Its top priorities are debt reduction and a narrowing of income disparity, Louisa Lo, China fund manager at Schroders, said in an outlook report on December 15. “The policies can be fine-tuned if necessary, but will not be reversed, as a long-term shift in economic drivers and derisking are still the focus of policymakers,” she said.

The resulting crackdown aims to steer China towards a more consumption-driven economy, said Ken Peng, head of Asia-Pacific investment strategy at Citi Global Wealth Investments. That will bolster the growth of China’s middle classes, which are expected to increase by 150 million in the coming decade, he said in a report published in December.

China’s stressed property sector, for instance, was a case in point, he said. While Beijing’s tightened scrutiny of property developers had led to defaults, it would benefit consumers. “The flipside is the liberation of savings that were stashed away to invest in property. These could be spent on greater consumption,” he said.

China’s economy

But the immediate effect of the common prosperity goal was to slow down China’s economy, which softened throughout 2021. It was further exacerbated by Covid-19 outbreaks, cooling property markets, power shortages and slowing exports, sending markets into bear territory.

This slowdown has led to many betting on policy easing, on Beijing loosening monetary and financial measures to shore up the economy. Signs have emerged, as the People’s Bank of China freed up liquidity for lenders last month.

“China’s market valuations appear to be near the floor and should be well-supported from here,” Manraj Sekhon, chief investment officer at Franklin Templeton emerging-markets equity, said in a note on December 15. “While near-term headwinds from regulatory uncertainty and China’s ‘zero-Covid-19’ stance could extend into 2022, policymakers stand ready to stabilise economic growth if needed.”

As with the rest of the world, China is adjusting to structural inflation, as the cost of goods leaving China’s factories surged by a decade-high last year.

That could peak in 2022, as supply chains improve, said Schroders’ Lo. “2022 could be a better year for high-quality consumer stocks … [as those] with strong brand power may be able to pass through high input costs to end-consumers amid a better consumption environment.”

What lies ahead

Global asset managers see green energy among the bright spots in the market, amid China’s push for carbon-neutrality by 2060. Among the top 10 performing stocks on the CSI300 Index in 2021 were Trina Solar, JA Solar Technology and Huaneng Power International. Chinese electric carmaker BYD was among the best performers last year on the battered Hang Seng Index, with a 31 per cent jump.

Energy transition, electric vehicles and high‑performing computing are major trends for China in the next five to 20 years, said Zheng Wenli, who manages the China Evolution Equity portfolio at T Rowe Price.

A prominent downside is that regulatory overhang may persist.

“Regulatory uncertainty could continue. We believe that the recent regulatory changes are partly a function of China’s political cycle, which is likely to culminate in the 20th National Congress,” said Franklin Templeton’s Sekhon. The 20th National Party Congress, China’s main political event this year, will take place in October and could bring clarity to markets on reform direction.

Other global asset managers such as BlackRock Investment Institute remained positive about Chinese equities despite the regulatory uncertainty.

“We recognise the [regulatory] risks, yet see current valuations as offering eligible investors adequate compensation for them,” Yu Song, Blackrock’s chief China economist, said in a 2022 outlook report published last month. “We stay moderately positive on Chinese equities as we see a shift to a slightly easier policy. We expect the regulatory clampdown to last but not intensify.”

Another major domestic risk was China’s zero-Covid strategy. The country has continued to impose strict restrictions even as a growing number of countries turn away from lockdowns, as seen from authorities sealing off Xian amid its latest outbreak.

“Periodic lockdowns against even small flare-ups of infections have come at great cost to the economy, inhibiting consumption and services recoveries,” Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said on December 15.

“The more frequently such restrictions are imposed, the greater the risk that the domestic recovery is permanently impaired,” he said.

Author: Cheryl Heng, SCMP