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GUEST ARTICLE: Why China Equities Look Attractive Again - Standard Chartered Private Bank

Clive McDonnell, 15 March 2017

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The private bank gives its views on why it makes sense to consider at least maintaining exposure to Chinese equities.

The following article is by Clive McDonnell, head of equity strategy at Standard Chartered Private Bank. He writes about the state of the Chinese economy and the performance of Chinese equities. The editors of this news service are pleased to share these views with readers; they do not necessarily endorse all views of guest contributors and invite readers to respond. They can email tom.burroughes@wealthbriefing.com.

China’s equity markets have been on a wild ride in recent years. After peaking in 2015 at its highest level since 2007, the Shanghai Composite Index plunged almost 50 per cent by January 2016. Since then, the index has returned more than 20 per cent. The Hang Seng China Enterprises index on Hong Kong-listed China stocks has recovered more than 30 per cent since the 2016 lows.

We believe the China bull market can continue.

First, China’s economy has stabilised after a couple of years of fiscal, monetary and credit easing. Although growth has been on a secular downtrend since 2010, the National People’s Congress has set a healthy 6.5 per cent growth target for 2017.

The stabilisation in economic activity - which is confirmed by the so-called "Li Keqiang" index which tracks underlying economic indicators such as bank lending, rail freight movement and electricity consumption - has helped calmed nerves, slowing down capital outflows in recent months. A resilient economy, combined with a broadly range-bound dollar and official measures to restrict fund outflows, has helped stabilise the renminbi. Economic conditions are likely to remain stable as China’s policymakers head into the once-in-five-years Communist Party Congress in autumn this year to pick its next batch of leaders.

Second, Beijing’s efforts to tighten capital controls have resulted in increased domestic liquidity. As capital can no longer flow as freely overseas, it is finding its way into domestic asset markets, including equity and real estate markets. Although increased supply of real estate and administrative controls has slowed the pace of property price appreciation in recent months, policies remain supportive, especially in the middle-to-smaller tier cities.

This, combined with the "trapped liquidity" from the capital control measures, has helped lift the housing market. The so-called "sell-through rate" - percentage of housing units sold at project launch - has risen in recent months as buyers return to the market. This has led to the outperformance of the real estate equity sector against the broader China stock market.

Third, the improvement in the underlying economic activity is showing through in rising corporate earnings expectations. Consensus estimates now forecast a 16 per cent earnings growth for the MSCI China index for 2017, up from a contraction of 8 per cent in 2016. This pace of growth is similar to the 15 per cent earnings growth in 2017 estimated for Asia ex-Japan as a whole.

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