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China’s Markets Are Tamed—but Not Tempting
The roller-coaster ride may be over, but global investors say that still hasn’t made China attractive for 2017
By ANJIE ZHENG
Dec. 28, 2016 5:27 a.m. ET
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Chinese stock regulators seem to have achieved one big goal in 2016: Curbing the markets’ famous roller-coaster trading. But many global investors say that still hasn’t made China an attractive place to put their money in 2017.
Chinese stocks have been remarkably docile this year, aside from a volatile January, when China’s benchmark Shanghai index plunged as much as 25%, setting off a global markets rout. On more than three-quarters of all trading days, the Shanghai index moved less than 1%—a far cry from 2015, when calm days accounted for less than half of trading time, and the index plunged as much as 43% in the summer.
The placid trading has generally been accompanied a gradual climb, following steps by Chinese authorities to bolster shares, including clamping down on margin lending—borrowed money used to buy stocks—and speculative trading. The state has also continued to directly buy stocks to prop up prices.
The Shanghai Composite has gained around 20% since its Jan. 28 low, although it is still down about 11% for the year.
Yet many investors say the market lacks reasons to continue climbing and they fear uncertain moves from regulators could damp gains. A recent selloff in China’s bond market and rapid devaluation of the yuan point to deeper troubles in the financial system and could trigger market panic in equities, they say. Analysts expect trading volumes to remain low as many Chinese retail investors, who historically comprise the bulk of trading, stay on the sidelines.
“It will likely be another tough year next year,” said Andrew Sullivan, managing director at Haitong International Securities Group Ltd.
Trading for mainland-listed shares, known as A-shares, will likely continue in a narrow range, said Qi Wang, chief executive at MegaTrust Investments, a Shanghai-based asset manager focused on mainland shares. “Unless momentum kicks in, we don’t see a fundamental reason for investors to rush into A-shares,” he said.
Huge swings used to be a hallmark of the $6.4 trillion Chinese stock market, but this year’s gains have been slow-brewing. Shanghai’s benchmark took 10 months to reach a bull market—a 20% rise from a low-point—this year. In contrast, in the six months after the 2015 summer crash, it entered a bear market twice and a bull market once.
Beijing has been eager to tame the market in part to attract foreign investors, who currently make up roughly 2% of the overall market. In early December, it launched a trading link connecting the Shenzhen and Hong Kong stock markets, which allows investors on both sides to trade the other’s shares. Takeup by global funds has so far been slow due to Shenzhen shares’ sky-high valuations and relative newness, they say.
Trading volumes and margin loans are a fraction of what they were during the peak before last summer’s crash, one reason for this year’s narrow band of trading. Beijing has continued to prop up share prices directly. The so-called national team of government-backed financial firms hold as much as 1.03 trillion yuan of A-shares, or 2.7% of the market as of September, according to estimates from Guolian Securities Co.
One major risk next year is the pace of the devaluing Chinese yuan, which hit an eight-year low against the U.S. dollar this year.
“Tighter capital controls against outflows would send a message to the market that we are in trouble,” said Vincent Chen, head of exchange-traded funds business for China Asset Management (Hong Kong) Ltd.
To be sure, some investors are sanguine on A-shares. The Shenzhen-Hong Kong trading link has raised expectations that A-shares may finally be included in the leading international index tracker MSCI’s benchmarks, tracked by some $1.5 trillion of global funds. MSCI declined to comment on possible inclusion next year.
Victoria Mio, Chinese equities fund manager at Netherlands-based Robeco Group, says her portfolio has profited from rises in mainland construction and trucking stocks on improving commodity prices and expectations of fiscal spending. Robeco is planning to launch an A-share fund, which Mio calls a “long-term strategic move” demonstrating the house’s interest in A-shares.
Another potential boost could come if Chinese investors transfer money out of the overheated property market back to the stock market, as Beijing imposes restrictions on property sales. Some investors say this rotation is already happening, although the amount is a drop in the bucket compared with overall trading volumes.
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