China has already been welcoming record inflows into its local-currency debt after making it easier for foreign investors to access domestic securities and winning inclusion in a key global bond index.
SHANGHAI: Chinese markets look set to begin another turbulent year, with stock and bond investors’ fortunes tied to trade tensions, currency pressures and policy makers’ ability to shore up growth.
One support, however, should come from some $120 billion of fresh foreign money, as Chinese securities become more important in major investment-guiding indexes. Meanwhile, local investor sentiment appears to be brightening—with a growing sense that battered stocks look cheap, and that China’s trade brawl with the U.S. will force it to open its economy further and implement long-promised reforms.
Chinese stocks have proved the worst performers among major world markets of the past year. The benchmark Shanghai Composite Index is down 24.6% this year. The economy is set to see its slowest rate of growth in 28 years, with the median forecast for expansion at just 6.6% in 2018, according to 15 economists polled by Wind, a Chinese data provider.
Still, this year’s steep declines have made China’s $6.6 trillion stock market “one of the most attractively priced emerging markets,” said Rebecca Jiang, China equities portfolio manager at JPMorgan Asset Management. The main Shanghai market is priced at 11 times earnings for the last 12 months, compared with a trailing price-to-earnings ratio of 23 for Mumbai’s and 19 for São Paulo’s, according to Wind.
Ms. Jiang is among some investors who remain hopeful the U.S. and China will strike a meaningful deal following their current 90-day tariff truce. She said more signs of economic weakness in the U.S. next year could make Washington more eager to reach an agreement with Beijing.
Some analysts now also expect the U.S. to succeed in pressing China to speed up reforms ranging from tax cuts to intellectual-property protections—which should benefit Chinese stocks, too. “China needs these reforms and the external pressure could quicken the process,” said Ivan Shi, research director at consulting firm Z-Ben Advisors.
In addition, Beijing has ample room to free up bank lending and further lower corporate borrowing costs. It also could afford to spur growth with a slightly wider fiscal deficit, or by enlarging the gap between overall state spending and total tax revenues.
“Trade-war uncertainty will surely bring about volatility, but Beijing also has space to use fiscal and monetary policies to support the economy, which is giving us cause for optimism,” said Mr. Shi.
Foreign capital also seems likely to keep flowing in, encouraged by major global index providers.
MSCI Inc. proposes quadrupling the presence of mainland-listed companies in one major index to 2.8% by August. That would pull $66 billion into China next year, according to Z-Ben. Rival FTSE Russell will add domestic Chinese shares to a flagship index from June, which could bring in about $10 billion of passive funds by March 2020.
Similarly, Bloomberg LP plans to add Chinese bonds to a flagship global index over 20 months from April 2019. The bonds will eventually make up nearly 5.5% of the index. JPMorgan estimates this will bring about $6 billion a month into China’s bond market, which at $12 trillion is the world’s third largest.
However, Beijing’s vulnerable currency could still scare off local investors and deter foreign institutions that aren’t required to track indexes closely.
One dollar now buys about 6.8658 yuan, after a 5.2% fall this year in China’s currency. Analysts and economists disagree about whether allowing the currency to slip below 7 per dollar would trigger a self-reinforcing period of panic and capital flight—even if such a depreciation were to occur at a measured pace.
“If the yuan depreciates too fast, it will be bad for both stocks and bonds as funds will flee the markets,” said Wu Zhaoyin, chief strategist at AVIC Trust Co., which manages roughly 650 million yuan ($94.6 million) in assets.
The median forecast among 14 economists polled by The Wall Street Journal put the dollar at 6.9886 yuan by the end of 2019.
“If you put stocks and yuan together, you will see a very strong correlation. Crossing the 7 level could mean chaos in the stock market, and Beijing doesn’t want chaos,” said Iris Pang, an economist at ING Markets, who added that Beijing needs to accustom investors to more two-way fluctuations in the yuan’s value. - WSJ
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