Following the recent turmoil in China’s markets, analysts said that the arguments to avoid China over the longer term have become stronger.
According to Bloomberg, the mainland stock markets are now moving more frequently than at any time since the global crisis in 2008. In addition, the cost of insuring Chinese government bonds against default has hit multiyear highs, and volatility of offshore yuan is near a record.
The HSCEI Volatility Index, a barometer of fear for the Hong Kong stock market, has soared 50% this year and far above its average over the last decade.
The turbulence is increasing in the fourth quarter, signaling more upheaval for 2023.
In fact, catalysts for sharp moves remain everywhere, from the COVID policy, to a real estate crisis, and from policy shifts to fraught relations between China and the United States. In addition, the economic outlook is more uncertain than ever both at home and abroad.
Bloomberg quoted traders saying that they are cautious.
Keiko Kondo is the head of multi-asset investments for Asia at Schroder Investment Management in Hong Kong. She said, “Investor sentiment is still quite fragile — one thing people don’t want to have is too much volatility.”
She added, “That is why we haven’t gone all the way to overweight on Hong Kong and mainland shares.”
Kieran Calder, head of equity research for Asia at Union Bancaire Privee, forecast, “2023 is not going to be easy.”
He said that though China announced the loosening of the “zero-COVID” policy, his firm is still cautiously optimistic.
He said, “The big swing factor is how China gets out of COVID and how fast.”
Because of low valuations, there are buy calls on Chinese assets, but they contain a degree of caution.
Morgan Stanley strategists recently upgraded Chinese stocks, but wrote in a note, “The path will be bumpy.”
A team at BlackRock Investment Institute wrote, “Activity is restarting, but we see China on a path to lower growth.”
Christina Woon, investment director at Abrdn plc, said, “Things could remain volatile.”
China is considering a 5% growth target for 2023. To achieve that goal, it may need to manage a well-executed exit from the “zero-COVID” policy and provide more support for the ailing property sector.
However, with Chinese leader Xi Jinping securing a third term and implementing his “common prosperity” policy, China’s financial markets may remain at risk.
Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote that the Chinese market is likely to be volatile amid a bumpy transition period ahead.
But he added that there are some sectors benefiting from China’s shift to eventual reopening, such as pharma and medical equipment, consumer, internet, transportation, capital goods, and materials.
Simon Edelsten at Artemis Investment Management LLP in London said that the arguments to avoid China over the longer term have become stronger.
Edelsten said that his team has cut exposure to Chinese assets.