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Reasons To Be Cheerful About China's Equities

Tom Burroughes

6 December 2022

Reports that Beijing is at last considering easing its zero-Covid policy have already prompted a gain in mainland equity markets. After months of being hammered by domestic and global headwinds, might China’s equity market be due for significant gains?

Xiaolin Chen, head of international at and a specialist in Chinese investments, thinks the case for owning the country’s stock market – at least within certain constraints – looks increasingly compelling. In valuation terms and when likely reforms are considered, the market has a lot to offer, she told this news service in a recent call. (KraneShares operates a suite of exchange-traded funds.)

“China has gone through a very intense period to shift to a new direction. Over 2021 and first quarter of 2022, the government put a framework in place to accommodate the growth in China, especially in the internet sector by introducing a series of regulations. The introduction phase was completed and there was no announcement of new major regulation since March 2022 as it moved on to the implementation stage,” she said. 

“Now, however, the situation is getting clearer, with policy on Covid moving in a more liberal direction," she said. "The 20 measures of the updated Covid policy introduced on 11 November made a key first step of China’s reopening. To name a few, over 1,300 student visas were issued for India. China’s National Health Commission announced a continued push to vaccinate the elderly,” Chen continued. 

Chen differs from the kind of view given by Tiger Global Management, the firm overseeing $125 billion in AuM. The US firm reportedly paused its investments in China after President Xi consolidated his power.

The Chinese economy has been hit by Beijing’s zero-Covid policy and last year’s clampdown on sectors including technology and areas such as for-profit/after-hours schooling. The real estate sector is a worry – given its share of GDP – because of heavy debt exposures, as shown by the default of property developer Evergrande, for example. Beijing’s oft-stated desire to re-take Taiwan, its security crackdown on Hong Kong, alleged mass theft of intellectual property and encroachments into the South China Sea have also put it at odds with the West. President Joe Biden’s administration has also restricted exports of silicon chip tech to China. Another worry is that in the longer term, China faces a declining population problem as the consequences of the now-defunct “One Child” policy are being realised.

The MSCI China Index, as of 2 December, was down 32.5 per cent (in dollars).

The prospect of looser Covid regulations has cheered investors.

“Overall, relaxation of China on Covid control policy spurs hope for border reopening, particularly in the Greater Bay Area because this part of the region does most international business and has a large enough economy on its own that is already the economic size of Italy,” Ronald Chan, founder and chief investment officer of Chartwell Capital, the Hong Kong based investment firm, said.

“Hong Kong and Macau will see instant benefits when this happens. Currently, the Hang Seng Index trades at its historical low P/E ratio of 7x. If you look at the past 15 years, the average is roughly 11x. Sector wise, tourism-related and domestic consumption will benefit the most. Total revenue from tourism-related sectors may see over 30 to 40 per cent growth if the border between Hong Kong, Macau, and other cities within the Greater Bay Area opens up. And, if more provinces in China open up to Hong Kong and Macau, I think the expectation can be much higher,” he said.