China - Market Strategy 04 (Aug 18 - Jan 23)

[winston]

China Strategy - How to position amid regulatory overhangs to linger on

We expect the regulatory overhangs to linger on in 2H21 especially in light of the latest move by the regulator to set up a special task force in regulating the internet sector.

We believe it would be too early to assume the impacts of regulatory tightening on the internet sector are more or less priced-in and the risk of further downward earnings adjustment, especially for next year, cannot be ignored.

We maintain our relative preference to the onshore A-share equities, which has relatively less exposure to the industries that are under the scrutiny of regulatory guidance.

In addition, sectors that are expected to benefit from government policy support will be favoured, and they are highlighted in our key investment themes in the 14th Five-Year Plan, such as, renewables (e.g. solar), new energy vehicle (NEV) and its supply chain, domestic consumption, and new infrastructure.

For instance, telecom and semiconductors are expected to benefit from the roll-out of 5G and solid demand for chips.

Industrial automation should continue to ride on strong order momentum from lithium, machine tool, solar segments etc.

Given the elevated volatility, we would recommend accumulate on pull back and the results announcement will provide a reality check for investors to gauge the growth outlook and expectations reset.

Source: OCBC

[winston]

Investors plow US$3.6b into Chinese stocks despite regulatory crackdown

Funds focused on Chinese stocks saw net inflows of US$3.6 billion in the week ended Wednesday, of which US$300 million went into China tech funds.

Flows into U.S. stock funds were about 0.1 percent of assets under management at the beginning of the week, versus a little over 1 percent for China ones.

Source: The Standard

https://www.thestandard.com.hk/breaking ... -crackdown

[winston]

Chinese Stocks Jump as Beijing Signals More Economic Support

by Jeanny Yu and Abhishek Vishnoi

Monday’s move higher follows a much-watched Politburo meeting Friday, which was seen to indicate that authorities will likely take more steps to help struggling small businesses, boost fiscal spending and possibly reduce the reserve requirement ratio for banks again.

“Some investors are buying dips thinking most of the bad news on regulations is behind them”. “It has been oversold. The resurgence of virus cases is also aiding hopes that PBOC may ease policy in the second half.”

Investors may also find comments from the Chinese securities regulator over the need for talks with its U.S. counterpart over initial public offerings reassuring.

Source: Bloomberg

https://finance.yahoo.com/news/chinese- ... 02174.html

[winston]

China stocks are bull traps as market regulators’ pain threshold remains untested: BCA Research

More than a week of stock sell-offs will be needed for policymakers to halt regulatory reforms, strategists at BCA Research say in report

China has traded short-term pain for long-term benefits under its multi-year growth planning; that pain threshold remains untested by stock slump

Investors should avoid Chinese stocks for now because more losses are likely to unfold over the next six to 12 months, according to BCA Research.

Investors will be kept on edge by a confluence of a slowing economy and heightened regulatory oversight. The market will oscillate between technical rebounds when macro policy eases and sell-offs when industry regulations tighten.

“Investors should resist the urge to buy on the dip”.

Source: SCMP

https://www.scmp.com/business/markets/a ... -threshold

[winston]

No bad market news allowed in China

Darkness falls on Chinese markets as censors warn against the spread of 'maliciously' critical economic and financial content

By WILLIAM PESEK

Source: Asia Times

https://asiatimes.com/2021/08/no-bad-ma ... 340db87eb1

[behappyalways]

President Xi Announces New Stock Exchange For SMEs In Beijing
https://www.zerohedge.com/geopolitical/ ... es-beijing

[winston]

CHINA STRATEGY: REGULATORY GUIDANCE TRANSITIONING TO THE MID-PHASE

The policymakers are advocating “common prosperity” as the key goal for the next development stage.

The 14th Five Year Plan (FYP) called for an "action plan" to make progress towards achieving the goal, which is targeted to be fully realized by 2050.

We believe there are five key elements that the government will focus on when rebalancing policy priorities so as to strive for the “common prosperity” goal.

Hence, we believe regulatory guidance will continue in 2H21, and is transitioning to the mid-phase, where the focus would be on finalizing and rolling out regulatory arrangements and implementation.

Key events to watch out for to gauge implementation and clarity on government stance would include key policy meetings (such as the Sixth Party Plenum in November), and major industry development (such as the announcement of the outcome of data security review on data-heavy internet platforms and the amended Antitrust Law in the next few months).

While MSCI China index stabilized last month, it underperformed the onshore A-share market by 121ppt.

The current regulatory campaign is likely to have more impact on MSCI China than the onshore A-share market as the sectors that are affected account for around 40% index weight in MSCI.

As such, we reiterate our relative preference for the onshore A-share equities within the Chinese equity universe.

We retain our preference to key investment themes in the 14th Five-Year Plan, such as, renewables, new energy vehicle (NEV) and its supply chain, domestic consumption, and new infrastructure.

Sectors and industries that are align with China's new policy priorities should continue to get policy support.

We expect share price volatility stays elevated for internet and platform plays. In this note, we are highlighting investment themes relating to
i) renewables,
ii) an expected acceleration of local government special purpose bond issuance, and iii) the imminent launch of the Greater Bay Area (GBA) Wealth Connect.

The expectation of an acceleration in the issuance of local government special purpose bond should support infrastructure spending to catch up towards the end of this year and early next year.

It would be favourable for domestic demand-driven infrastructure capex plays, including construction equipment and infrastructure contractors, and selective materials.

The GBA Wealth Connect, it offers long-term structural growth opportunities to HK and China banks with broad product offerings and strong retail franchise.

Source: OCBC

[winston]

China Strategy – Pricing regulation risk.

The China Tech sector has bounced 14% off the recent lows (+US$230bn in market value) as left-tail risks (e.g. full nationalization) have been partially priced out on more regulatory clarity and adaptive corporate responses.

Still, the paradigm shift suggests that comprehending, tracking, and pricing regulation risk will be critical for investing in China going forward.

We construct a China Regulation Barometer (GSSRCNRG) by extracting the “regulation beta” across 4 main policy cohorts—Antitrust, Financial Markets, Data Security, and Social Sector—to estimate market-implied concerns on announced regulations.

We stay Overweight China A that is less sensitive to regulation risk and favorably exposed to macro policy easing.

Sectorally, Pharma and Hardware may have overpriced the regulation concerns vis-a-vis their regulation betas.

Source: GS

[winston]

China Strategy - Assessing Evergrande impact on Chinese financials

The deterioration of Evergrande’s cash flow and liquidity situation has raised market concerns. In this note, we will focus on assessing the exposure and impact on Chinese banks and Chinese insurers.

For Chinese banks, we believe systemic risk on Chinese banking system is relatively low and manageable given that Evergrande had a total of CNY1.2trn total borrowings and trade payables as of Jun-2021, which accounted for around 40bps of total credit in China.

Chinese banks exposure to property developers’ loans varies among different groups with higher exposure for joint-stock banks like China Minsheng Bank and Ping An Bank with around 10% of total loans were property developers’ loan as of 1H21.

The Big-5 state-owned banks had relatively low exposure with property developers’ loans accounted for about 2-5% of total loans.

Also, it is estimated that the size of property financing in banks’ WMP has reduced to CNY2.3trn as of end-2020, representing about 1% of total banking system asset.

Hence, we believe property related shadow banking, represented by bank WMP, is unlikely to pose a major threat to the banking sector in a property downcycle.

For Chinese insurers, conversations with various firms’ management teams post 1H21 results suggest that large listed insurers do not appear to have meaningful positions related to Evergrande.

Ping An’s management has disclosed its total exposure to the property sector is below 5% of its investment portfolio, which implies other listed insurers may have similar single digit exposure due to similarities in their allocation to debt and investment properties.

Listed insurers’ allocation to non-standard assets were estimated at 15-32% of their investment portfolios as of end-June 2021, which is below the industry average of about 37%.

Leading listed insurers’ balance sheets are well-capitalised with solvency ratios meaningfully above regulators’ minimum requirement, which should help the sector withstand near-term market volatility from real estate sector worries.

Valuations of Chinese banks and Chinese insurers are already at bearish levels across any common metrics.

While the concern over property-related risks appears overdone as sectors’ share prices overshoot on the downside, BOS’s base case is for an eventual containment of the contagion risk.

For investors looking to accumulate or average down existing positions, we advise to monitor for further stabilization in risk sentiment in the property sector and bottoming out of Chinese insurers’ new business value momentum, which should still be pressured for the remainder of this year before a gradually improving outlook next year.

For Chinese banks, despite the sector offers relatively attractive forward dividend yield of 8-10%, investors should bear in mind that Chinese banks pay dividend once a year with the next dividend payment will be in Jun-Jul 2022.

We maintain our Neutral stance on banks within Chinese equities. Among Chinese banks, we maintain our preference for those with robust fee income growth and strong retail franchise.

Given the market volatility and concerns that have been highlighted, investors are recommended to accumulate opportunistically on the dip.

Source: OCBC

[winston]

China Market Strategy New report: Concerning but no need to panic

The recent liquidity issues faced by Evergrande, a major real estate developer in China, has stirred the market and sparked concerns of further contagion.

CS Chief China economist believes that the stress is not expected to evolve into the “Lehman moment” of China. Our global equity strategist sees no systemic risk to China’s growth.

To gauge the magnitude of total debts of Chinese major developers, we assessed items both on and off balance sheet.

*We expect property activities to continue trending down. Chinese banks that grant about 27% of their RMB loans to property, will be under pressure. Supply restriction remains as the key driver for materials, while construction companies with limited property exposure will benefit from accelerating infrastructure spending. We expect demand for AC and kitchen appliances to slow from 4Q22.*

We prefer Angang (H), Anhui Conch (H), CR Cement, CCCC, CRL, Longfor, CMB, NBB, NJB, PSBC, Haier Smart Home and Midea.

We lower TPs for a few of the companies that may be affected.

Source: CS