Dynamics behind the volatility
Duhra analyses China’s reforms in the context of geopolitics and demographics. “One of the reasons Australia kept growing without recession was partly because of population growth, which – followed by productivity – is important for GDP growth. China is lacking in those two areas, so they’ve decided to restructure the economy. Redistribution of wealth has become a key theme, which they term as ‘common prosperity’. The move was a little bit messy; it manifested itself in terms of regulation after regulation in some sectors, and investors lost confidence.”
According to him, regulatory momentum appears to be slowing. “There’s been talk about less regulation from the Chinese government, and the number of Covid cases seems to have stabilised as well, so we may be reaching a point where we might see a relaxing of Covid-zero policies. Suddenly, things have changed and the market is starting to move.”
BNP Paribas AM’s Tea said four factors were mostly behind the volatility: regulatory tightening; a property market downturn on the mainland; Covid lockdowns and its spill-over effect on supply chains; and inflationary pressures, especially against rising geopolitical risk in Europe.
“Covid is probably one of the biggest risks to the equity markets at the moment,” she added. “And China has been a victim of its own success of the zero-Covid policy. Recently, Chinese officials have indicated that they are maintaining the zero-Covid policy, even though it is supposed to be temporary, given that this is a very politically important year.”
Tea also pointed out the stark difference between on and offshore equity volatility. Typically, China onshore markets show much higher volatility compared to China offshore, but this time some Chinese offshore names were heavily impacted.
“It has been particularly volatile due to the regulatory tightening, particularly in big tech and the internet space. We need to keep in mind that China tech serves long-term development goals in China, especially to solve the demographics issues, the inequality problems, but also to better defend national security. The goal in recent years and especially last year has been to put the tech and internet sectors under proper supervision.”
Chen sympathises with the Chinese government’s abrupt shift in attitude on after-school tutoring. “I am a 100% supporter of getting rid of that very unfair business. The poor kids in China! I have relatives who live in China, and when we go back on vacations, we never see them because they are occupied by maths, English and all sorts of subjects. They are occupied with English tutoring until 10pm in the evening, even on weekends. It’s even worse during summer holidays because kids must catch up with the next level. And think of all the capital chasing these activities.”