The Retired Investor: Chinese Stock Market on a Tear

A combination of anti-business government policies, worsening U.S.-Sino relations, and several draconian actions by Chinese authorities have cast a pall over foreign investment and the Chinese stock market. Chinese equities have lost $7 trillion since the market's peak in 2021. That interests me.

 

On Wall Street, the Chinese stock market is now considered "uninvestable." Main Street and the politicians who represent them are just as negative. Anti-China rhetoric and U.S. actions, from the attempt to force a sale of TikTok to forbidding Chinese nationals from buying land here, is just the tip of the iceberg.

 

It is as if we are already at war with China. In a recent opinion piece in the New York Times, Rory Truex, an associate professor at Princeton University who focuses on Chinese authoritarianism, says it best.

 

"America's collective national body is suffering from a chronic case of China anxiety. Nearly anything with the word 'Chinese' in front of it now triggers a fear response in our political system, muddling our ability to properly gauge and contextualize threats."

 

That attitude usually spells opportunity in the investment world. I do not dispute the gravity or seriousness of that country's political and economic issues. Much of the malaise in China is of their own making. The zero-COVID policies gutted their economy. The government authorities, unlike those of the Western world, did little to help the country recover. The impact of the Trump trade wars lingers on with no resolution. The lifetime appointment of Xi Jinping created an even more rigid authoritarian government. I believe Xi's one-man rule felt threatened by the success of China's successful free-market-oriented companies. Policies were promulgated that stripped those companies of their entrepreneurial spirit, increased the government's control with management, trod on shareholder rights, and, as a result, sent their share prices to historic lows.

 

The Chinese support of Russia's invasion of Ukraine cemented the growing anti-China policies in Europe. In the U.S. these negative attitudes gathered even more steam as China grew closer to Russia. Is it any wonder that "uninvestable" became the new watchword for China?

 

However, what so many Americans forget is that hundreds of U.S. companies have huge investments in China. China revenues, for example, account for 19 percent of Apple's sales, while 44 percent of its suppliers' production sites are based in China. Caterpillar, Tesla, McDonald's, Nike, and Starbucks; I could go on, but you get the point.

 

Bank of America's manager survey recently noted that the most crowded trades in the global stock markets were to go long on U.S. technology, followed by shorting China technology. In January, the mainland and Hong Kong experienced a meltdown as even Chinese investors threw in the towel.

 

However, since Feb. 2, stocks began making a comeback. There were no big announcements of government stimulus but there was a visible relaxation of many of the policies that brought on the crisis of confidence in the first place. As a result, China technology is now beating both U.S. technology and U.S. large caps by more than 20 percent. The overall market has gained more than that. And yet most global investors remain underweight in the world's second-largest economy.

 

In international investing, I have learned to pay attention to what the locals are doing. Chinese investors are, without question, already buying Chinese stocks. The "National Team," i.e. investors associated with the country's sovereign wealth funds, are buying mega-cap Shanghai and Shenzhen-listed stocks. Mainland investors are buying Hong Kong-listed stocks as well.

 

American investors are only beginning to take notice. By types of investors, momentum traders like hedge funds and some individual investors that can move quickly are starting to dip their toes into these waters. If this rally persists, more institutions will begin to see this rebound as something more than a dead-cat bounce. In this case, institutional investment committees will meet to discuss changing their "underweight" positions and may up their investment stance to neutral.

 

But institutions move slowly, and this will take time. However, active fund managers that track their performance against world indexes are already behind the eight ball thanks to the recent rally and their underweight China stance. At some point, (likely when Chinese stocks experience a minor pullback), some of these funds will start buying.

 

In any case, we could be looking at the beginning of a longer-term reversal in the Chinese stock market. Now, Chinese equities are experiencing a sharp bout of profit-taking after ten up days in a row. This is normal and could be an opportunity to get in.

 

Granted, buying equities in China is not for the faint of heart. I would say it is about as risky as buying cryptocurrencies, maybe more. Since most emerging markets funds have some portion of their funds invested in China, that may be a less risky way to go if you decide to take a flyer on China, even if it is "uninvestable."

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.