(Bloomberg Markets) — In 2021, Chinese stocks that trade on overseas exchanges underperformed onshore shares by a wide margin. Global investors were spooked by President Xi Jinping’s move to tighten regulations on industries such as internet companies, online tutoring providers, and property developers. In China, however, a lot of fund managers see things differently. They say the selloff was an overreaction, although some concede that Beijing acted clumsily. We talked to 10 money managers, most of whom manage long-only funds that invest in Chinese equities, to find out what they think the world may be missing. Their responses have been condensed and edited for clarity.
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WANG HONGYUANCo-founderFirst Seafront Fund Management Co.ShenzhenManages about $30 billion in assets
It’s wrong to view the recent regulatory crackdown on e-commerce giants, efforts to deleverage the property sector, and the push for “ common prosperity” as an assault on the private sector. Rather, it is a pivotal long-term state strategy devised to help the economy grow further by narrowing its wealth gap and avoiding the middle-income trap.
China stocks are underresearched among foreign investors, who tend to focus only on the top three players in each industry. As a result, they have missed a lot of opportunities. Last year, in spite of a 5% drop in the benchmark CSI 300 Index that tracks the 300 largest stocks listed in Shanghai and Shenzhen, many midcaps—which are not on the radar of most foreign investors—registered various gains. The market inefficiency has provided investors who know about China with plenty of opportunities. Hong Kong-listed Chinese stocks, in particular, are a bonanza in light of their steep valuation discount against their mainland counterparts.
HUA TONGFund managerShenzhen Zhengyuan Investment Management Co.GuangzhouManages about $1.6 billion in mostly A-share-focused funds
Capital plays and has always played a much smaller role in politics here. This is in contrast to the U.S., where capital and government have largely reached a consensus on basic issues such as where the interests of the nation lie. There is less of a tug of war between politicians and capitalists in the U.S. [than there is in China].
The Chinese government and the Communist Party are ultimately seeking to fully utilize all sorts of resources, be it environmental resources, labor, data, and allocate them to fully maximize their benefit so that China becomes a modern, efficient, and more competitive nation.
RICHARD PANChief investment officer of global capital investmentChina Asset Management Co.BeijingManages about $260 billion
For many global investors, China remains an emerging market. They evaluate China using EM metrics and invest primarily in big companies including financials, internet companies, consumer names, etc.
However, China has more to offer, especially in the space of advanced technologies. Leveraging one of the world’s largest pools of engineering talent and the wide breadth of industry supply chains, China is gradually moving up the global value chain from a “world factory” to a real innovator.
In China’s equity market, it’s not difficult to find companies that are world leaders in their respective areas, such as solar energy, electric vehicles, renewable technology, and AI [artificial intelligence]. In the onshore equity market, an increasing number of alpha opportunities have yet to be included in mainstream indexes and are likely to be neglected 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 XUManaging partnerOriza FOFsSuzhouManages and advises on about $23.9 billion of investments in Chinese venture capital funds
China is not a pure free-market economy. The essential question is whether a pure free market is still the most desirable model, given the global macroeconomic environment that we are in.
The U.S.-China relationship is unlikely to go back to a honeymoon period. The two countries will inevitably have periodic competition that will influence the shape of global order. But capital flow is relatively free of political considerations. International investors are more apprehensive of risks arising from government intervention and how government policies can hand a fatal blow to an entire industry. But they have seen China’s past growth and how it is unrealistic and unwise to ignore China from the investment perspective.
The Chinese government has a clear agenda. Some policy actions may have been a bit rushed and heavy-handed. But China’s embrace of international investors and the integral role that international money plays in China’s development have not changed. It’s unlikely that the Chinese government intends to lure international capital in and then shut the door behind it.
WANG QICEOShanghai MegaTrust Investment (HK)Hong KongManages about $700 million, mostly invested in China’s A-share market
People worry that the Evergrande crisis will bring down the whole real estate market. Unlikely. Evergrande accounts for just 3% of the Chinese property market. And while real estate is slowing in some parts of the country, it is still growing strongly in other parts. This economic diversity means there is still plenty of growth ahead, even though the headline GDP is slowing.
Some investors believe sectors like consumption have lower or no policy risk in China, and that you can reduce policy risk at the portfolio level by overweighting those sectors. Wrong. The fact is, all sectors and all companies in China are subject to policy risk. Whether a sector has lower or higher regulatory risk is really time dependent. For example, Big Tech Internet, which had virtually no negative policy risk in the last two decades, now faces the biggest regulatory scrutiny in history. Investors need to be prepared.
LU JUNFounderShanghai Congrong Investment Management Co.ShanghaiManages about $1.2 billion in assets
Investors are still looking at China largely as a consumer story. In about 20 years, there will be Chinese technology companies capable of competing head-on with their U.S. and European counterparts, and foreign countries may have to rely on China for certain technologies. The U.S. restrictions on technology transfer to China are serving as a catalyst for China to develop indigenous technology.
Investors have misinterpreted the regulatory crackdown. It is not aimed at reining in technology companies or manufacturing businesses. It is more directed at oligarchies, the likes of HNA Group Co. and Anbang Group Holdings Co.
WANG QINGPresidentShanghai Chongyang Investment Management Co.ShanghaiManages about $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 stimulate growth in 2022. China’s macroeconomic policy this year has shifted to a growth bias. Not only have monetary and fiscal policies loosened, 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 result may exceed expectations.
At the same time, investors overestimated the negative impact of the regulatory crackdowns. Historical experience has repeatedly shown that when multiple regulatory policies in China are introduced, they usually first appear in a forceful way—and that’s meant to achieve some deterrent impact on the market. And then they tend to shift to a more normal rhythm.
YANG LINGCo-founderStarRock InvestmentBeijingManages about $2.36 billion
Foreign investors saw the flurry of Chinese regulatory moves in the second half of last year as indications of a major change in the nation’s underlying policymaking logic.
That was a big misunderstanding. China’s policymakers are just shifting toward a more holistic “top-down” approach to reform after experience was accumulated through decades of more gradual “feeling-the-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 general managerShanghai Minority Asset Management Co.ShanghaiManages more than $1.57 billion
International investors are overly pessimistic about the outlook for China’s banks, as reflected in the sharp discount at which the banks’ Hong Kong-listed stocks are trading to their mainland-listed counterparts.
Although China’s economic growth is slowing and banks’ interest spread has narrowed, their asset quality has been improving. The Chinese banking industry’s nonperforming ratio had fallen to about 1.75% at the end of September, from 1.96% a year earlier. Moreover, their capability to withstand risks has improved after raising their bad debt provisions. We think international investors may have misjudged the potential of the Chinese banking industry.
PAN JIANGGeneral managerKandao Asset Management Co.ShanghaiManages about $150 million in assets
Last year the Chinese government issued strict regulatory policies on the education and internet industries, which made overseas investors worry that the authorities were embarking on an anticapital, antimarket campaign, and some of them started to turn pessimistic about the Chinese market. We think this is a misunderstanding. We believe that these policies are only aimed at individual industries. The policies are conducive to fair and full competition in those markets.
There is room for China’s government to improve in terms of transparency of its policymaking process and expectation management. From the perspective of some Western countries, the Chinese policymaking practice skips the legal process. It’s more like an administrative order. In the future, the government should also consider strengthening communication with the market.
With assistance from Charlie Zhu and Mengchen Lu in Shanghai, April Ma and Zhang Dingmin in Beijing, and Bei Hu in Hong Kong
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