18 October 2019
China's market intervention measures have caused some unease among global investors. Photo: Reuters
China's market intervention measures have caused some unease among global investors. Photo: Reuters

Why H shares are a better deal after the China equities slide

The recent market sell-off in China has unnerved global investors. Mainland individual investors have struggled with margin calls, triggering the crash in equity prices.

The Shanghai Composite Index fell more than 30 percent in four weeks until July 9. That said, the market has posted a whopping gain of 150 percent since last year and is still up for this year.

We can say that the worst is behind us, as the leveraging extended to individual investors has slid by two thirds to 81 million yuan from a peak of 2.27 trillion yuan.

Some have noted the risk in umbrella trust funds. Mainland banks usually sell wealth management products to individual investors with guaranteed fixed yield. While specific investment return cannot be assured on stock-linked products, some players may however seek to maintain a certain level of yield in order to maintain their reputation. Amid this situation, investors should be wary of potential risks.

Meanwhile, the debt pile of Chinese companies has already surged to 93 trillion yuan in late May from 31 trillion yuan at the end of 2008.

Many state-owned enterprises have taken advantage of the bullish stock market in first few months of this year to issue shares and raise funds. But after the market meltdown, they may struggle to obtain financing to repay the debt. Global investors, in the meantime, might be skeptical about China’s reform agenda.

Unlike mature markets, China still has ample room for boosting economic growth. Inflation has expanded by 1.4 percent in June from the year before, far below the government target rate of 3 percent. Therefore, we can expect more interest rate cuts and reserve ratio requirement reductions.

Over the past year, Chinese authorities have launched several financial reforms, including the Shanghai-Hong Kong Stock Connect, opening up of the bond market, and mutual fund recognition with Hong Kong. These moves have been applauded by market participants.

However, global investors are questioning the recent market intervention measures, wondering if the moves could jeopardize the country’s financial reform and hamper the internationalization of the Chinese currency.

The market intervention measures included ban of short-sales and ordering some state-owned companies to buy stocks. And more than half the listed firms suspended trading at one point recently.

China needs to improve the economic and financial market framework in the first place, through moves such as beefing up the control on margin financing. More importantly, authorities should focus on measures to boost economic growth in the long run.

Many foreign investors didn’t suffer from the recent rout in Chinese equities as they haven’t joined the mainland market yet. They are worried about the risks behind a liquidity-driven market, and would like to see more improvement in the real economy.

Beijing has unveiled various reform plans in recent months. For example, Citic Group brought forward a massive restructuring plan, and Tencent Holdings (00700.HK) and Alibaba have been awarded financial licenses. And the interest rate liberalization is moving ahead.

Also, authorities have relaxed their grip on drug prices, aiming to beef up the industry’s competitiveness.

Mainland brokerages have been asked not to sell until the Shanghai benchmark index hits 4,500 points. The move is aimed at restoring market confidence. However, that could cap the further upside for the market as the brokers could sell when the market reaches 4,500.

By contrast, I’m more optimistic about H-shares in Hong Kong. Some small-cap stocks may continue to suffer from volatility after posting drastic gains earlier, but many bluechips are at attractive levels for long-term investors. Also, the shares offer a 50 percent discount compared to their A-share peers.

This article appeared in the Hong Kong Economic Journal on July 20.

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at [email protected]


Chief Investment Officer at Allianz Global Investors, Asia Pacific