News on Chinese equities

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AXA IM’s senior strategist, Mathieu L’Hoir, and Emerging Asia Economist, Aidan Yao, have been advocating caution on Chinese equities for some time, but recent developments have made them more constructive. Among others, the government is accelerating corporate-sector reforms which should lift Chinese companies’ competitiveness and profitability, while there are tentative signs that banks are starting to deal with their non-performing loans. These changes should help Chinese equities to re-rate and deliver between 5% and 10% total return over the next 12 months, which justifies having Chinese stocks in portfolios.

Key Points

  • Recent developments have made us more constructive on Chinese equities and we now favour holding Chinese stocks in portfolios.
  • From an earnings perspective, the government is accelerating corporate-sector reform. If successful, this should lift the competitiveness and profitability of state-owned enterprises, while creating a level playing field that fosters growth and efficiency in private-sector companies.
  • From a valuation perspective, moves to rebalance the Chinese economy and deflate the asset price bubble are helping to reduce the equity market risk premium. Liberalisation of the capital account, through the Hong Kong Shanghai Stock Connect scheme, is expected to boost liquidity in A-share markets, assisting the re-rating process.
  • There are tentative signs that Chinese banks are starting to deal with their non-performing loans through asset sales, capital raising and cooperation with “bad banks”. Further movement in this direction could help remove uncertainties and boost valuation of equity markets.

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