Chinese equities — don’t wait for the bottom

Current market valuation for China’s equities for onshore and offshore suggests an extremely attractive rating


Chinese equities, be it onshore or offshore, tumbled by more than 28% and 25% respectively, from their respective peaks in early 2018 due to tightening credit conditions and the ongoing trade dispute between the US and China.

Last week, investors saw news headlines like “China’s economic growth hits nine-year low” or “China’s growth slowest since financial crisis as trade war looms”.

No doubt, China posted the lowest growth rate since 2009 with economic activity growing by 6.5% year-on-year (YoY) in the third quarter (3Q).

While some claimed that the slowdown was a result of the trade dispute, official data was not telling the same story.

In the 3Q, China recorded strong exports growth of 11.4%, 9.1% and 14.5% on a YoY basis in July, August and September respectively.

Exports to the US grew to a historical high of US$46.7 billion (RM196.14 billion) in September, creating a record trade surplus of US$34.1 billion with the latter.

We believe the slowdown in the Chinese economy does not signal any major issue as the government is now focused on quality and sustainable growth.

The 6.5% growth is considered rather strong given the size of China’s economy and still remains on track to meet its full-year growth target of about 6.5% YoY.

On Oct 19, top Chinese financial regulators spoke in support of the local market with the media. Their statements were focused on the mismatch between sound fundamentals of the economy and the poor equity market performance.

The financial authorities have proposed a few plans aimed at stabilising the financial markets, which include allowing wealth management product funds to invest directly into stocks and scrap the minimum investment requirement of investors in such products.

The China Banking and Insurance Regulatory Commission is planning to permit insurers to create specialised products to help resolve liquidation risks from equity-pledged lending, while the central bank is looking into measures that could support private enterprises in bond and equity financing, as well as credit enhancement services for firms unable to issue such securities.

President Xi Jinping has promised to provide unwavering support to the private sector saying the words and practices that negate and weaken the private economy are wrong and to support the development of private enterprises is always the Party Central Committee’s consistent policy.

The current market valuation for China’s equities for both onshore and offshore is suggesting an extremely attractive rating.

Corporate earnings are expected to record double-digit growth rates over the next couple of years even after experiencing earnings downward revision over the past few months due to the trade-related issue.

Coupled with the current undemanding valuation, Chinese equities are expected to deliver an annualised return of more than 30% by end-2020.

Looking at the current economic backdrop, cheap valuation and supportive regulators, we believe it will be worth the risk to invest in Chinese equities given the limited downside risk.