Intensifying geopolitical tussle and dimming economic outlook is threatening to nip one of the few winning China stock trades this year in the bud.
Eye-popping gains in shares of China’s state-owned enterprises earlier in the week were quickly reversed in the following days. A gauge of the cohort finished the week 1.8% lower after surging to a one-year high on Monday. The benchmark CSI 300 Index extended declines to a fifth week, the longest losing streak since August.
Dire readings on inflation and credit expansion, coupled with more signs of a decoupling with the West, rekindled skepticism over the broader market and hampered the one of the dominant haven trade this quarter — state-linked companies. The latest swings are a reminder that any thematic trades are prone to China’s broader macro weakness.
“The recent key economic data out from China has indicated that the growth spurt from the ‘post-Covid zero reopening’ policies has dissipated,” Kelvin Wong, senior market analyst for Asia Pacific at OANDA, wrote in a Friday note. “Heightened geopolitical risk may push away foreign investors.”
Overseas investors turned net sellers of mainland stocks in April after five straight months of net buying. Italy’s intension to pull out of Beijing’s Belt and Road Initiative, China’s diplomatic spat with Canada, and the US’s push on Group of Seven nations to curb tech exports to China have all been putting investors on edge.
The SOE trade has gained traction this year as authorities vowed reforms to boost efficiency and facilitate access to funding. The group, perceived as crucial in delivering President Xi Jinping’s economic initiatives, has been a rare bright spot after the reopening rally faltered.
China has a sprawling array of state firms, with the central government directly controlling 98 state behemoths that include top banks, mobile operators and energy producers. Once shunned by investors given their low efficiency, they have been given a second look amid a top-down push to boost the sector’s valuation.
The share surge earlier this week was accompanied by huge volumes and options trading, which pointed to a rally driven more by momentum than fundamentals. But the gains faded all of a sudden Tuesday afternoon. Bank of China Ltd., one of the most prominent gainers on Monday, gave up most of its 10% rise by Friday.
The latest economic data have fueled concerns over the health of China’s economy. Consumer prices barely grew and producer prices remained deep in deflation, while credit expansion fell far short of expectations, with a proxy for mortgages posting its first decline in a year. Manufacturing activity contracted and imports plunged.
Meanwhile, Xi Jinping’s crackdown on perceived threats to national security is roiling the vast industry of consultants who help global investors understand China, It is also threatening the government’s attempts to lure foreign capital into the country.
All that has driven investors to take profit.
The CSI 300 fell 1.3% Friday even as a meeting between US National Security Adviser Jake Sullivan and China’s top diplomat showed efforts to defuse tensions. The benchmark has now erased a bulk of its reopening rally to trade less than 2% up for the year, with once-hot trades including artificial intelligence bets losing momentum.
Some investors, however, are holding on to their SOE bets, saying that the recent volatility is just a blip in an uphill trajectory.
“Efforts to boost SOE’s efficiency aren’t going to show up in earnings immediately, but it’s a more convincing and lasting play than the AI theme, which is purely based on anticipation” said Jiang Liangqing, managing director at Zhuhai Greenbamboo Private Fund Management. “To the authorities and an increasing number of market players, lifting valuations for SOEs is no laughing matter.”
A gauge of state-owned stocks tracked by Industrial Securities has a price of book value of 0.9 times, the lowest in nearly four years, with nearly a third of the members trading below book value. Goldman Sachs Group Inc. strategists project the aggregate market cap of SOEs could be boosted by 20% if the reform impulse translates into better growth, according to an April note.
“The China recovery and rebound will come through, it’s just not coming quite as quickly as everyone thought it might,” James Thom, senior director of Asian equities at abrdn, said in an interview in New York.
--With assistance from John Cheng and Yiqin Shen.
