Mark Williams

Why are Chinese stockmarkets this year’s top risers?

Mark Williams

China stockmarkets 2019 top risers

The very strong rise in Chinese stock markets this year reflects a reversal, or at least an easing, in the headwinds which held the region’s equities back in 2018. Specifically, both dollar strength and trade frictions have abated. Notwithstanding the scale of this year’s rally, we are still finding plenty of good value investment opportunities in Chinese equities via Hong Kong-listed H shares.


The US dollar appreciated by more than 10% in trade-weighted terms in 2018, placing substantial pressure on Asia and emerging markets which are susceptible to capital flight and rising (US dollar) debt servicing costs when the greenback strengthens. This year, the dollar has been largely flat.


The main cause of last year’s dollar strength was the US Federal Reserve’s implementation of four separate rises in its benchmark interest rate and its switch from quantitative easing to quantitative tightening.  


As we began 2019, we already expected this unhelpful headwind to die down, as the Fed’s own December-released forecasts only called for two more rate rises in the year. Since then, the Fed’s rhetoric on monetary tightening has softened even further, with a shift towards a “patient” policy on future rate rises. This recently culminated in a new set of interest rate projections issued at its March policy meeting which point towards no rate hikes at all in 2019. The Fed also announced plans to pause quantitative tightening – the programme which is slowly unwinding its asset purchases under quantitative easing. All of this suggests that further strong dollar gains of the type seen in 2018 are fairly unlikely.


Similarly, trade tensions already seemed to be ebbing away at the start of the year due to the agreement of a 90 day suspension of a tariff rise from 10% to 25% on Chinese imports. Sentiment surrounding the ‘Trade War’ has only improved as both parties have made conciliatory noises, with the Trump’s new tariff deadline of 1 March again pushed further down the road “until further notice”.

Even if the higher tariffs were eventually implemented, we actually think the short-term economic impact may be smaller than many believe. Most Chinese companies would be able to avoid a substantial proportion of the costs by relocating production or could pass cost increases through to prices. The Centre for Economic Policy Research has estimated that 2018 trade frictions saw “complete passthrough of the tariffs into domestic prices of imported goods” for the US.

Aside from a trade thaw and less rampant dollar, the third factor we’ve yet to mention is the one over which China exerts the most control: domestic fiscal and monetary policy. In contrast to western economies that have largely exhausted their policy arsenal after a decade fighting the aftermath of the global financial crisis, Chinese authorities have substantial scope to ease policy. This year they have used some of this flexibility to engage in a sensible strategy of counter-cyclical easing.

At the National People’s Congress earlier this month, the new 6% - 6.5% GDP target garnered most international attention but this merely reflected an ongoing, necessary, long-term economic slowdown and transition. Of greater interest to us were the shorter-term measures introduced to dampen the impact of a cyclical downswing in the global economy.

Premier Li announced VAT cuts, the restrictive tone on property announcements appears to be easing and infrastructure projects continue to be supported. Importantly, the policies do not seem to be an echo of 2009’s debt splurge, with many projects funded via government bonds rather than the shadow banking sector, and with the government deficit to GDP set at 2.8%.Encouragingly, its Government Work Report also stated aims to attract further foreign capital by widening market access and opening the financial sector, an essential long-term goal to secure international funding.

While the 30%+ year-to-date performance of China’s domestic A shares means they aren’t as cheap as they were, we still see lots of value in Chinese shares. Hong Kong-listed Chinese shares (H shares) have rallied less than the A shares and still only trade on a forward price/earnings of 8.9 times. We have increasing confidence in the market benefiting from a Chinese recovery in the second half of the year.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, March 21, 2019, 11:28 AM