By Emily Lai
In spite of the Chinese stock market having dropped 30% and the Chinese economy growing at a 6 year slow, PineBridge Investments still sees it as in a better position than during the market downturns of 2008 and 2011 and believes the correction is a buying opportunity in Hong Kong.
Desmond Tjiang, Portfolio Manager of Hong Kong and Greater China Equities at PineBridge Investments believes the turmoil in the stock market will not cause a systemic problem for the economy because shares only account for less than 20% of China’s household wealth, while the banking system’s exposure to the stock market is estimated to be around 1% to 2% of total assets.
Having said that, such a rapid correction still affects investors’ confidence, especially when the Chinese government has been pushing out bundles of policies that have not created any effect. “The recent government intervention has raised moral hazard concerns and fear about liquidity,” he tells BENCHMARK. “These are exactly the two factors that we were previously positive on for China, and now they are on hold. However, the tumble boosts our confidence that the Chinese government would retain their positive fiscal and monetary policies in the coming quarters to shore up the economy.”
Tjiang notes that in the new normal stage, the macro-economic data in China would be low, but also already stabilizing. Companies’ margins and earnings would benefit from more monetary easing and this would in turn fuel the market. According to data from Citi estimates and Bloomberg, most sectors would see a 40-100 basis points’ boost in return in equity with a 100 bps interest rate cut. Sectors benefiting the most would be information technology, automobiles, utilities and retailing.
With the government focusing on the stock market in the near term, Tjiang finds the reform agenda to be slowing. But in the long term, he believes there will be more reform in the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the government will reduce the level of control through the official body and the trend of mergers and acquisitions would continue. He says he has already seen the results of reforms at the corporate level, where companies reduce their capital expenditure and sell the non-performing loans to parent companies. As for the economy, the effect would take a much longer time to filter in. And, as the government is now looking at the quality of economic growth instead of quantity, he believes the economic growth would not go back to the 8%-era even with the full effect of the policies. BM