Chinese fund managers explain how they invest in China
(Bloomberg Markets) – In 2021, Chinese stocks that trade on overseas stock exchanges have significantly underperformed onshore stocks. Global investors have been spooked by President Xi Jinping’s move to tighten regulations on sectors including internet companies, online course providers and property developers. In China, however, many fund managers see things differently. They say the sellout was an overreaction, although some admit Beijing acted clumsily. We spoke to 10 fund managers, most of whom run long-only funds that invest in Chinese stocks, to find out what they think the world might miss. Their responses have been condensed and edited for clarity.
WANG HONGYUANCo-founderFirst Seafront Fund Management Co.ShenzhenManages approximately $30 billion in assets
It is wrong to view the recent regulatory crackdown on e-commerce giants, housing sector deleveraging efforts, and push for “common prosperity” as an attack on the private sector. Rather, it is an essential long-term state strategy designed to help the economy grow further by narrowing its wealth gap and avoiding the middle-income trap.
Chinese stocks are understudied by foreign investors, who tend to focus only on the top three players in each industry. As a result, they missed a lot of chances. Last year, despite a 5% decline in the benchmark CSI 300 index that tracks the 300 largest stocks listed in Shanghai and Shenzhen, many mid-caps – which are not on most investors’ radar foreigners – recorded various gains. Market inefficiency has provided investors familiar with China with many opportunities. Hong Kong-listed Chinese stocks, in particular, are a boon given their steep valuation discount to their mainland counterparts.
HUA TON Fund Manager Shenzhen Zhengyuan Investment Management Co.Guangzhou Manages approximately $1.6 billion in funds primarily focused on A-shares
Capital plays and always has played a much smaller role in politics here. This contrasts with the United States, where capital and government have largely reached consensus on fundamental issues such as the interests of the nation. There is less tug of war between politicians and capitalists in the United States [than there is in China].
The Chinese government and the Communist Party ultimately seek to make full use of all kinds of resources, be they environmental resources, labor, data, and allocate them to fully maximize their benefits in order to for China to become a modern, efficient and more competitive nation.
RICHARD PANChief Investment Officer of Global Capital InvestmentChina Asset Management Co.BeijingManages approximately $260 billion
For many global investors, China remains an emerging market. They rate China using emerging market metrics and invest primarily in large companies, including financial companies, internet companies, consumer names, and more.
However, China has more to offer, especially in the area of advanced technologies. Leveraging one of the world’s largest engineering talent pools and the industry’s vast array of supply chains, China is gradually moving up the global value chain from a “global factory” to a true innovator.
On the Chinese stock market, it is not difficult to find companies that are world leaders in their respective fields, such as solar energy, electric vehicles, renewable technologies and AI. [artificial intelligence]. In the onshore equity market, a growing number of alpha opportunities have yet to be included in traditional indices and risk being overlooked by global investors. Even industry leaders like CATL [Contemporary Amperex Technology Co., the world’s biggest maker of electric-vehicle batteries] and Mindray [medical-equipment maker Shenzhen Mindray Bio-Medical Electronics Co.]which have generated lucrative returns for investors, were only recently added to the CSI 300 index.
CHERRY XU Managing Partner Oriza FOFs Suzhou Manages and advises approximately $23.9 billion of investments in Chinese venture capital funds
China is not a pure market economy. The key question is whether a pure free market is still the most desirable model, given the global macroeconomic environment in which we find ourselves.
The US-China relationship is unlikely to return to a honeymoon period. The two countries will inevitably experience periodic competition that will influence the shape of the world order. But capital flows are relatively free of political considerations. International investors are more fearful of the risks arising from government intervention and how government policies can deal a fatal blow to an entire industry. But they have seen China’s past growth and how unrealistic and unwise it is to ignore China from an investment perspective.
The Chinese government has a clear program. Some political actions may have been a bit rushed and brutal. But China’s embrace of international investors and the vital role international money plays in China’s development have not changed. It is unlikely that the Chinese government intends to attract international capital and then close the door behind it.
WANG QICEOShanghai MegaTrust Investment (HK)Hong KongManages approximately $700 million, mainly invested in the Chinese A-share market
People fear that the Evergrande crisis will bring down the whole real estate market. Unlikely. Evergrande represents only 3% of the Chinese real estate market. And while real estate is slowing in some parts of the country, it continues to grow strongly in other areas. This economic diversity means that there is still plenty of growth to come, even if overall GDP is slowing.
Some investors believe that sectors like consumption have little or no political risk in China, and that you can reduce political risk at the portfolio level by overweighting these sectors. Wrong. The fact is that every industry and every business in China is subject to political risk. Whether a sector has lower or higher regulatory risk really depends on time. For example, Big Tech Internet, which had virtually no negative political risk for the past two decades, is now facing the greatest regulatory scrutiny in history. Investors need to be prepared.
LU JUNFounderShanghai Congrong Investment Management Co.ShanghaiManages approximately $1.2 billion in assets
Investors still view China largely as a consumer story. In about 20 years, there will be Chinese technology companies able to compete head-on with their American and European counterparts, and foreign countries may have to rely on China for certain technologies. US restrictions on technology transfer to China serve as a catalyst for China to develop indigenous technology.
Investors misinterpreted the regulatory crackdown. It is not intended to hold back technology companies or manufacturing companies. It caters more to oligarchies, like HNA Group Co. and Anbang Group Holdings Co.
WANG QINGPresidentShanghai Chongyang Investment Management Co.ShanghaiManages approximately $5 billion, mainly in onshore and Hong Kong stock markets
International investors have underestimated the Chinese government’s determination and ability to stabilize the economy and spur growth in 2022. China’s macroeconomic policy has shifted to a growth bias this year. Not only have monetary and fiscal policies eased, but other central and local government departments are cooperating by taking proactive measures. Such an economic adjustment, with Chinese characteristics, will quickly bear fruit, and its outcome could exceed expectations.
At the same time, investors overestimated the negative impact of regulatory repression. Historical experience has repeatedly shown that when several regulatory policies in China are introduced, they usually first appear forcefully, and this aims to have a chilling effect on the market. And then they tend to move on to a more normal pace.
YANG LINGCo-founderStarRock InvestmentBeijingManages approximately $2.36 billion
Foreign investors saw the flurry of Chinese regulatory measures in the second half of last year as indications of a major shift in the logic underlying the country’s policymaking.
It was a big misunderstanding. Chinese policymakers are just moving towards a more holistic ‘top-down’ approach to reform after experience has been accumulated over decades of more gradual ‘feeling stone’ trials [from late Chinese leader Deng Xiaoping’s description of China’s early experiments with economic reform as “crossing the river by feeling the stone”]. More investment opportunities could arise as the crackdown on monopolies creates more room for innovative startups.
JESSICA CHENCo-Founder and Managing DirectorShanghai Minority Asset Management Co.ShanghaiManages over $1.57 billion
International investors are overly pessimistic about the outlook for Chinese banks, as evidenced by the steep discount at which shares of Hong Kong-listed banks are trading relative to their mainland-listed counterparts.
Although China’s economic growth is slowing and banks’ interest margins have tightened, their asset quality has improved. China’s banking sector non-performance rate had fallen to around 1.75% at the end of September, from 1.96% a year earlier. Moreover, their ability to resist risks has improved after increasing their provisions for bad debts. We believe that international investors may have misjudged the potential of China’s banking sector.
PAN JIANGGeneral ManagerKandao Asset Management Co.ShanghaiManages approximately $150 million in assets
Last year, the Chinese government issued strict regulatory policies on the education and internet sectors, prompting fears among foreign investors that the authorities were embarking on an anti-capitalist, anti-market campaign, and some of them have started to become pessimistic about the Chinese market. We think this is a misunderstanding. We believe that these policies only target individual industries. The policies are conducive to fair and full competition in these markets.
The Chinese government can improve in terms of the transparency of its policy-making process and the management of expectations. From the perspective of some Western countries, China’s policy-making practice ignores the legal process. It is more of an administrative order. Going forward, the government should also consider strengthening communication with the market.
With the help of Charlie Zhu and Mengchen Lu in Shanghai, April Ma and Zhang Dingmin in Beijing and Bei Hu in Hong Kong
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