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Chinese stocks among the worst performers in Asia amid regulatory scrutiny

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Investors watch computer screens at a stock exchange hall on July 13, 2020 in Nanjing, Jiangsu Province, China.

Jiang Ning | VCG | Getty Images

The days of heavy selling in Chinese stocks have left two major indexes in the country as the worst performing markets in the Asia Pacific region.

At the close of regional markets on Tuesday, the CSI 300 Index – which tracks the largest listed stocks in mainland China – is down 8.83% so far this year. Hong Kong’s Hang Seng also suffered heavy losses, falling 7.88% in the alike period.

“There hasn’t been a single two-day drop (for the Hang Seng Index) since the financial crisis has outpaced the former two days,” analysts at Bespoke Investment Group wrote in a note.

Other major indices on the mainland, such as the Shanghai Composite and Shenzhen Component were also in negative territory for the year, among the few major Asia Pacific markets that have lost ground a year to date.

Separately, the MSCI Emerging Markets Index has also fallen into negative territory for the year. Chinese internet giants such as Tencent, Alibaba and Meituan were among the top 5 components of the index, as of June 30.

The declines come as Chinese regulators persevere to ramp up their oversight in sectors ranging from technology to education and food delivery. Increased scrutiny has spooked investors and prompted many to seek an exit.

Hong Kong and China markets were trading mixed in beforetime morning trade Wednesday, struggling to recover from the declines of the former few days.

At the start of the second half, all major Chinese indices and the Hang Seng Index were in positive territory for the year. The Shenzhen component is up 4.78% while the CSI 300 is up only 0.24% at the end of June. Hong Kong’s Hang Seng Index is also up 5.86% in the alike period.

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The sobering message might be: “You can get the company out of China, but you can’t get China (risks) out of the company.”

Vishnu Varathan

Head of Economics and Strategy, Mizuho Bank

Mizuho Bank’s Vishnu Varathan said in a note on Tuesday that Beijing’s intentions “cannot be blamed on merit,” noting that authorities’ concerns about sectors such as education have been in social welfare, while technology is “ostensibly trained to worry about data rights/issues.” abuse”.

However, he acknowledged the “unintended consequences” of Beijing for not timing and controlling the implementation of its intentions appropriately.

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“For (global) private investors brutally fainted by the brazen shocks of so many of these internationally listed Chinese companies, the heartening message might be: ‘You can get the company out of China, but you can’t get China out of the company.

JPMorgan sees ‘opportunity’ in mainland stocks

Even in the current market commotion, JPMorgan Private Bank’s Alex Wolf sees opportunity in mainland-listed stocks, which are harder for retail investors to access than those listed in Hong Kong.

Most Chinese stocks – the sector worst affected in the recent market crash – are listed offshore in the US and Hong Kong, Wolf said, and these tend to be largely owned by foreign investors due to the difficulty of accessing them for mainland investors. He is the company’s head of investment strategy for Asia.

“We like A stock on a relative basis just because it has less exposure to the internet, and it’s also less exposed to foreign inflows,” Wolf told CNBC.

A stock refers to shares of China-based companies listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange.

We think Stock A represents a pleasing opportunity amid this turnaround and amid…some of the uncertainty that we’re seeing.

Alex Wolf

JP Morgan Private Bank

“From the perspective of inner investors, ‘A’ stocks – we think given that the majority of them are locally owned – we think are often associated with policy initiatives,” he explained.

Wolf cited Beijing’s policy initiatives such as a shift toward decarbonization and localization as steps likely to benefit companies listed in mainland China.

“We think A stock represents a pleasing opportunity amid this turnaround and amid … some uncertainty that we’re seeing,” he said.


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