HONG KONG: Investors are reducing their risk exposure ahead of China’s Communist Party Congress in October, preferring the relative safety of mainland blue chips as they wait for signs that Beijing is ready to address the economy’s problems.
The ChinaAMC China 50 ETF, the country’s largest exchange-traded fund, has witnessed a near 30% jump in its assets this month, channelling more than 10 billion yuan (US$1.4bil or RM6.45bil) into Shanghai’s 50 biggest stocks.
That’s driven by what some analysts term the “Beijing put” or the belief that authorities will keep markets stable ahead of the 20th Communist Party congress, to be held from Oct 16.
But investors have little appetite to make bets about what happens beyond that event, which would see Xi Jinping anointed for a third five-year term as the supreme leader and a shuffle of personnel on the decision-making Politburo.
It’s a challenging time for the economy as authorities prioritise political stability over growth, the yuan slides and global equity markets sell off.
Investor positioning is markedly conservative, with most betting on A-shares, seen as more resilient and as having the lowest correlation with United States and European markets.
They also hope issues currently clouding investor confidence, such as zero-Covid policies and property sector stress, will ease after Xi’s reappointment.
“We are quite defensive and cautious about China this year. We are still underweight China, but what we are monitoring are more of the positive signposts that are coming through,” said Robert St Clair, a strategist at Fullerton Fund Management in Singapore.
St Clair says Fullerton likes A-shares as domestic-listed firms in new technologies and industries could benefit from the country’s common prosperity initiative.
According to Francois Savary, chief investment officer at Prime Partners SA, a Swiss wealth manager with approximately US$4.1bil (RM18.9bil) in assets, it is difficult for investors to avoid exposure to China.
Key questions centre on what happens after the congress and whether Xi will take a reformist or conservative approach to economic management.
“Can the congress change everything and can it stabilise the situation in China?” Savary asked. “I don’t think so.”
Staying neutral is a safe option while there is uncertainty about what a more powerful Xi would do, he said, referencing Beijing’s recent push to clean up the real estate and technology sectors and his long-term desire for a more self-sufficient and equitable China.
The “Beijing put” is in play already. According to Reuters, regulators recently asked some fund managers and brokers to avoid large equity sales ahead of the congress.
Indus Capital Partners, a New York-based investment manager, started to reduce exposure to China in Pan-Asian funds in 2021 but has since returned. Greater China’s exposure has increased slightly in its US$1.37bil (RM6.3bil) long-only fund, Indus Select.
“I wouldn’t be too underweight going into this congress as I don’t think China’s challenges are that unprecedented in the world,” said Byron Gill, managing partner at Indus Capital Partners.
Swiss private bank UBP also re-entered China in August, accumulating A-shares.
“There is some optimism that you’ll see a gradual loosening of some of the zero-Covid restrictions that will at least provide some cyclical support to the economy,” said Norman Villamin, UBP’s chief investment officer of wealth management.
A Morgan Stanley survey shows 42% of investors polled in September had increased China allocations over the past three months, up from 21% in May.
Some fund managers think Xi wants to quickly get back to the business of supporting the economy.
Derek Lin, a portfolio manager with Boston-based Columbia Threadneedle Investment, which manages US$598bil (RM2.76 trillion), expects China’s economy will gradually return to normal when Xi begins his third term.
Still, foreign flows have been fickle, mostly going into ETFs.
“Investors are just in this ‘wait and see’ mode to get more clarity that stronger growth can be achieved,” said St Clair. “That’s where the outcomes from the congress could be helpful.” — Reuters
