China, Explained series: Are A-shares still attractive in light of China’s recent policy actions?

The China Position 2021 study sponsored by Invesco and conducted by Economist Impact (previously The Economist Intelligence Unit), interviewed 200 asset owners globally during June and July of this year on their investment stance toward China. When it came to asset class selections, China onshore equities (A-shares) was still the most popular asset class for most respondents (52%), followed by onshore fixed income (51%) and offshore equities including H shares and US-listed China ADRs (50%). The results are in line with the 2019 findings.

The latest regulatory tightening measures by policymakers since the summer targeting sectors such as big tech, education and property caused a sell-off in July and the CSI300 declined by around 8%.¹ Concerns around regulation have undoubtedly increased market volatility in China’s stock market and as of the end of Q3 2021, China equities were lagging US markets by around 40%.²

However, the goal of these latest regulations to address monopolistic behavior, anti-competitive practices and data privacy issues all point to a common aim of ensuring sustainable economic growth, a more equitable business environment and reduction of inequality for Chinese people under the “Common prosperity” framework. The policies address fundamental ESG issues that are not dissimilar to those being touted in developed markets. The measures also drive home the message that Chinese companies who do not pay attention to sustainability are likely to get caught out either by regulatory surprises or long-term market actions and changes in consumer behavior. 

Since Deng Xiaoping’s market reforms in the late 1970s, policymakers have been in full pursuit of economic development. A natural consequence of this is that regulation has lagged behind. We are now in the catch-up phase and the jitters that have been seen in the A-shares market since the summer are in fact likely to promote a healthy long term operating environment for companies. 

Where do you see opportunities in A-shares in 2022? 

・China’s goals to achieve peak carbon dioxide emissions by 2030 and carbon neutrality by 2060 will have strong implications on their policy direction going forward. Policymakers will need to invest around 2 to 2.5% of China’s annual GDP for next 30 years in green infrastructure, raising industrial energy efficiency and adapting to changing consumer behavior to reach these goals.³ As a consequence, Chinese companies that make strategic shifts to their business model in order to capitalize on these policy directives are more likely to succeed (relative to those that ignore these drivers). 

・We are constructive on sectors that are strongly supported by policy tailwinds such as electric vehicles (EVs), upstream battery producers, alternative energy, technology hardware and high-tech manufacturing. However, the valuation risk in some of these areas is higher and global investors will need to take a long-term view on these industries.

・Healthcare is another sector we are positive on. China’s healthcare policy has been shaped by the government’s ambitions to provide universal healthcare coverage for the country’s 1.4 billion citizens. No other country is dealing with healthcare provision needs at this scale. China’s rapidly ageing population adds another dimension as citizens aged 65+ currently account for 12% of China’s population and this figure is expected to double by 2050.⁴ On the other hand, the public good nature of healthcare means that access to medicine and healthcare affordability are top agendas of every government. While there might be concerns over the government’s intention to control drug prices from time to time, policymakers continue to  encourage private sector investment as well as continuous innovation in healthcare to meet the multi-decade needs of this generation.

・Although global investors have remained on the sidelines of internet platform investments since the summer due to the regulatory uncertainty and the lack of near-term earnings visibility, we expect interest in this sector to rebound in 2022. It is important to note that China remains committed to developing their digital economy and technology will play a key role in China’s economic development in the coming decades.  

Which sectors could be avoided in 2022? 

・As China transitions to a greener economy, investors should be wary of so-called “brown” or high carbon emitting industries that will be negatively impacted during this transition process. While China’s recent power shortages highlight the fact that the transition to a low carbon economy is by no means going to be smooth sailing, in the long-term, given changes in policy direction and consumer behavior, such companies run the very real risk of having stranded assets that will lose value with time. 

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.

_{1  China Stocks Slip to End Wild Week as Traders Price New Reality, July 2021, https://www.bloomberg.com/news/articles/2021-07-30/china-stocks-slip-as-traders-price-a-new-reality-in-wild-week?sref=xv12TOW5
2  MSCI China
3  $15.56 trillion needed for carbon goals, February 2021, https://epaper.chinadaily.com.cn/a/202102/02/WS601886dea31099a234353b2c.html
4  Aging and Health in China: What Can We Learn From the World’s Largest Population of Older People? January 2020, https://www.prb.org/resources/china-aging-worlds-largest-population-older-people/}

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