An inflection point for China A-shares

Positive share market developments

Premier Li Qiang held a meeting on Monday January 22, asking authorities to take more forceful measures to stabilise the equity market and rebuild confidence.

While not finalised yet, Bloomberg reported that the Chinese government is considering multiple policy tools to stabilise the capital market including:

• Setting up a 2 trillion yuan (US$278 billion) equity market stabilisation fund for offshore Chinese institutions and investing via Northbound Stock Connect
• Investing at least 300 billion-yuan onshore equity market via China Security Finance Co or Central Huijin.

We think these policies are promising first step to support the share market. A similar rescue package was effective during the 2015-2018 market downturn and could act as a catalyst for a market rebound.

On the monetary policy front, China's central bank announced on January 24 a broad-based Reserve Requirement Ratio (RRR) cut by 50 bps, set to take effect on February 5. The cut proves to be more generous than the previous few rounds, and the banking sector will receive 1trn RMB additional liquidity. Ahead of us is the Chinese New Year from 9 Feb to 19 Feb, during which there is usually huge seasonal liquidity demand. The easing is much needed and will likely help boost the sentiment in the equity market.

Within the broader economic outlook

While China hit its 2023 GDP target comfortably (5.2% vs 5% target), the latest economic data releases still suggest retail sales weakness, on the other hand, industrial production and fixed asset investments (infrastructure) have stood up better.

Digging into China’s economy, if we consider the labour market, the real economy (goods market), and the financial market, they seem to be out of balance, so will require concerted government intervention, but the early 2024 signs are promising.

1. The labour market in China is characterised by a skillset mismatch. On the one hand, you have university graduates who are keen to get a job in well-paid tech companies, on the other side of the equation low-end factories are running short of labour. Until China’s economic transition/upgrade fully takes place it may remain a conundrum so authorities will need to manage this.
2. The real economy has had an uneven recovery since China’s over-hyped COVID-19 reopening. Commodities and energy are doing well however the real estate-related value chain continues to face headwinds. There is no doubt the Chinese economy has slowed.
3. These have both led to volatility in the financial market, reflected in the fall of Chinese mainland shares.

Compared to developed share markets, China equities have been pummelled down as investors worried about slowing GDP growth and stalled structural reform. Last year, China’s CSI 300 index was down close to 12% in AUD terms, making it one of the worst performing asset classes in 2023.

We think the difference between Chinese equities and developed market equities has less to do with company fundamentals and more to do with the lack of confidence among both foreign and domestic investors. According to Bloomberg, retail investors, at 220 million, account for around 60% of China’s stock market turnover.

Chinese authorities need to instil confidence for there to be a sustained recovery in the market, including property stabilisation, getting inflation back up, and local government debt resolution.

Should the policies be successful, we may look back upon the start of 2024 as the time to buy. Valuations are attractive, whichever metrics you use, be it forward price to earnings (P/E) or price to book. China's equity markets are trading well below the one standard deviation of the past 10 years. Compared with other regions in Asia, while India may have experienced favourable investor sentiment recently it might already be a crowded trade given forward P/E is almost 20x vs 10x in China.

We think China equities are at an inflection point where authorities need to re-engineer a new growth model. It will be crucial for the Chinese government to step out of its recent comfort zone, where real estate carried a great multiplier effect on the economy, and focus on industrial upgrades, in areas such as EV supply chain, solar and semiconductors.

We remain positive on the long-term growth trajectory of these new energy/high-tech sectors, as they have already started contributing more to the country’s exports and GDP growth. Another area, perhaps overlooked is healthcare. Some of China’s pharmaceutical and biotech companies have strong innovative drug pipelines and could also benefit from overseas business expansion.

Accessing China A-Shares

There are limited ways though in which Australian investors can acquire mainland China A-shares. VanEck has two ETFs that provide investors a way to participate in what may be the next growth phase for A-share investments.

1. VanEck FTSE China A50 ETF (CETF) -  Australia's only dedicated China A-shares market benchmark exposure. It is the most cost-effective beta ETF exposure to China A-shares in the Asian region. CETF is diversified across companies and sectors, comprising the largest and most liquid mainland China companies considered leaders in their sectors and pillars of the Chinese economy.
2. VanEck China New Economy ETF (CNEW) - gives investors easy access to China A-shares and the enormous potential growth opportunities in what are described as China’s ‘New Economy’ sectors.

• • • Technology;
    • Healthcare;
    • Consumer discretionary; and
    • Consumer staples.

CNEW Invests in 120 fundamentally sound and attractively valued companies assessed on 24 fundamental indicators across four analytical categories:

• • • Growth;
    • Value;
    • Profit; and
    • Cash flow.

Fundamentals:

Source: FactSet, as at 23 Jan 2024. Past performance is not indicative of future performance.

Points to consider when positioning a portfolio to include mainland China equities:

• CETF is Australia’s only dedicated China A-shares benchmark exposure and is the most cost effective beta ETF exposure for China A-shares.
• CNEW utilises VanEck’s RQFII licence giving the fund access to companies not available via Hong Kong Stock Connect and is a portfolio of up to 120 of the most fundamentally sound companies with the best growth prospects at the forefront of China’s ‘New Economy’. 
• These are Australian domiciled funds so there is no foreign tax paperwork for investors.
• CETF and CNEW are A$ unhedged.

Key risks:
An investment in CETF or CNEW carries risks associated with: China, financial markets generally, individual company management, industry sectors, ASX trading time differences, foreign currency, sector concentration, political, regulatory and tax risks, fund operations, liquidity and tracking an index. See the PDS for details.