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Magazine Issues » July-August 2022

China Roundtable: Has China become uninvestable?


Restoring China allocations
With regulatory zeal, the Chinese government may have turned its biggest tech companies into SOEs. Private equity investments in technology and education sectors have been wiped out. Some investors conclude that policies mean that the government doesn’t want investors to make excess returns, which are a financial cornerstone of asset management. The heavy hand of the state has revealed itself. Massive and possibly permanent disintermediation must be reconciled with volatility and diminution of value.

Duhra says these are among reasons he has been underweight China over the last 12 to 18 months. But he also points to household debt increasing year after year and that property market sales have “collapsed” and land sales have fallen, potentially spelling problems for local government.

“All of them would have been priced in last year and towards the end of last year when we had all of that negative news around property.”

Earnings expectations were very high at the beginning of this year – about 15%, noted Duhra, who is a co-portfolio manager of his firm’s Asian dividend income strategy. He described the expectations as “completely unrealistic”.

However, he does see value emerging under dividend strategies. “I just think that if we can shift a little bit away from SOEs and into some of these areas where China is trying to be more self-sufficient, then I think we can capture income and growth. It’s important for us to make that shift. I think there are structural issues there and still a lot of challenges in China, but we’re still adding new names, we’re finding opportunities...”

Chen looks toward long-term fundamentals reappearing. She points to the National People’s Congress in March, when Premier Li Keqiang spoke of 5.5% growth this year and the creation of 11 million new urban jobs. “He mentioned stability 76 times in his 16,000-word report, so he realised that the market doesn’t like this volatility.”

Commenting on the delisting of Chinese ADRs during an auditing dispute, she said: “The uncertainty over the status of US ADR listings shocked the market and it corrected 20% to 30% or even more. The following day Vice-Premier Liu He said, ‘We hear the ADR, we hear the internet platform companies, we hear all these concerns,’ and he addressed all of them. That’s very rare for a very senior figure in China to come out and tell you about the market’s concerns.”