Magazine Issues » July-August 2022

China Roundtable: Has China become uninvestable?

Three China specialists discuss the major uncertainty around the Chinese stock market – although at least one of them, who invests in the wider region, has added to an underweight China position since the start of the year.


Sat Duhra (Asia ex-Japan equities portfolio manager, Janus Henderson Investors)
Jessica Tea (Senior investment specialist, Greater China equities and Asia/global emerging markets equities, BNP Paribas Asset Management)
Dr Xiaolin Chen (Head of international, KraneShares)

Fund managers who invest in China have faced greater uncertainty since the traumatic regulatory moves in the technology and private education sector, and in light of Beijing’s reaction to the Covid-19 pandemic. Opposing arguments now exist about China’s long-term prospects and what investment standards need to be met for the return of foreign enthusiasm and capital.

One anonymous fund manager has declared that China is “uninvestable” because its regulatory shifts in technology and private education were sudden and they cost investors in listed and private equities “billions of dollars”.

The manager said: “The current attitude among portfolio managers is that funds that don’t have to be invested in China, or don’t need to meet a specific country allocation, won’t bother with China because it’s just too difficult to analyse and justify. They have lost so much trust and money.

“The regulatory regime and underlying politics are just too haphazard and unpredictable. Worst of all, for some big funds, China’s market cap has shrunk below 5% of their global portfolios, perhaps even to 3%, making it an insignificant holding relative to the rest of the holdings.”

This situation is especially perplexing as China remains the world’s second-largest economy and constitutes about 20% of MSCI indices.

Speaking at a Funds Europe/Funds Global Asia roundtable, Sat Duhra, Asia ex-Japan equities portfolio manager at Janus Henderson Investors, said: “I have also heard, as we all have, the word ‘uninvestable’ being bandied about when it comes to China, and you can see quite easily why investors have been put off. In the last few weeks, it has become less uninvestable; foreign flows and the market have picked up [and] sentiment is turning. So, I think that it’s a little bit sensational to say that it’s uninvestable. Investors currently are returning to that market.”

Duhra said some stocks, such as Tencent and Alibaba, have lately shown stronger performance, in some cases gaining 5% to 6%-plus in a single day. This suggests sentiment is returning – as is institutional capital.

Jessica Tea, senior investment specialist, Greater China equities and Asia/global emerging markets equities at BNP Paribas Asset Management, said: “Over the past year, China equity markets have been particularly volatile. It’s important to keep in mind that this volatility has always been part of Chinese equity markets.

“If you recall 2018 and 2015, the markets experienced a number of drawdowns. Recently, the magnitude of this volatility has been even more impressive, particularly for China offshore [equities], and actually in this type of situation it is typically a good time, especially for active management, to take advantage of those most pressing opportunities. It’s also true that the environment has become even more uncertain, given that a number of risk factors happened at the same time.”

Dr Xiaolin Chen, head of international at KraneShares, said: “We were on the road in May when we met around 14,000 clients during different events. We heard so much pushback. They couldn’t quantify it, but most of the feedback is about, ‘I don’t have the confidence, I just don’t feel right.’ It’s very dangerous for an asset manager to say, ‘I don’t feel right.’ Feelings are very hard to correct and quantify.”

She added: “What hurt investors’ confidence is a lesson in what China can do or can learn about communication and transparency. Tell the market what you are doing, what you are planning to do, what you are intending to do. What is the aim? What is the goal?”

Duhra said: “You must balance events with what the Chinese are trying to achieve and the opportunities that it creates.”

Duhra pointed to three salient factors in the souring of sentiment towards China’s markets this year: China’s Covid-zero policy; concern over the relationship with Russia and the possibility that one day, sanctions will be imposed on China, possibly in connection with Taiwan; and disruption in the market for Chinese companies that issue US American depositary receipts (ADRs), where there have been delistings. This caused “the greatest volatility I’ve seen in a few days in the Chinese markets [ever] since I’ve been looking at it”.

He added: “Even before that, there has been a restructuring of the economy because the demographics were not favourable, and productivity has come off.”

Chen believes better stakeholder communication is required. “I’m not criticising the reforms or regulation. I am saying there is a better way to communicate with investors, the media and asset managers. Investors are not against regulations and reforms; we just don’t like surprises.”


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