In mid March 2022, I wrote an article suggesting that the bottom may be in for China stock.
Since then, the price action has been astounding.
The MSCI China ETF is up 30%:
Hang Seng Tech is up 36%:
And at an individual stock level, performance is even better.
Meituan is up 100%, and Bilibili is up 50%
So… have China stocks finally bottomed?
It is time to load up on China stocks?
Why this is the bottom for China stocks?
Now for obvious reasons, while I have my own views on this, I don’t profess to be 100% correct.
So what I will do – I will share 3 reasons why this is the bottom.
And 3 reasons why this is a falling knife.
I will then share my own views, but I leave you, the reader, to decide if I am correct.
If you disagree, just let me know in the comments below!
1. Liu He’s statement in March 2022
My March 2022 article was sparked by Liu He’s policy statement.
For those new to China politics, Liu He is a very senior guy.
If he speaks, you listen.
And what he said on 16 March 2022, is that:
- Overseas listing is ok – Chinese government “supports all types of enterprises to go public outside China”
- Better communication on policy crackdowns – Any policy with “significant impact on capital markets” should be better communicated in advance, to maintain stability and consistency of policy expectations
- More cautious on contractionary policies – New policies will continue to be introduced, but to be more cautious in bringing in contractionary policies
- Long term goal is still economic growth – But stable development of capital markets in the short term will be considered
The fact that such a senior guy like Liu He came out to say something like this, was very positive.
And stocks rallied very strongly on that news.
Policy action since then has been very positive
Since Liu He’s words in March 2022, there have been no new crackdowns on tech firms.
And we’ve been getting some very positive headlines out of China.
Here’s talk that the probe into Didi will be wrapped up soon, and Didi can onboard new customers again:
And even talk about reviving Jack Ma’s Ant IPO.
The irony isn’t lost on this horse.
It was Ant’s IPO crackdown that sparked the entire tech rout in China. Wouldn’t it be fitting that Ant’s IPO spark the end of the crackdown?
So from a policy perspective, things are looking promising so far.
2. The timing is uncanny
Let’s take a step back.
Imagine you’re Xi, gunning for an unprecedented third term at the Party Congress in late 2022.
The biggest threat to your claim is economic or political instability.
How would you play your cards, to get “reelected”?
Well – if it were me, I would engineer a broad 12 – 18 month economic slowdown. With a bear market in stocks, and stamping out unnecessary leverage in the system.
And then 3 – 6 months before my Party Congress, I would start lifting the crackdown.
And start stimulating the economy with fiscal and monetary stimulus.
The benefit is that this:
- Allows me to take out my strongest political and economic opponents under the pretence of the economic slowdown.
- Stamps out any economic instability via an engineered economic crash (instead of leaving it to the free market like the west).
- Gives me powerful economic momentum heading into my Party Congress.
I mean I’m not saying this is what Xi is doing.
Nor do I profess to know what he’s doing.
All I’m saying, is that if I were to do it, this is how I would engineer it.
Which was why mid 2022 was always a very interesting point for me as a potential bottom for China stocks.
And so far at least, the timing is uncanny.
3. Price action is supportive
As the saying goes – “there’s nothing that helps you change your mind like price”.
And price action so far, has been very supportive.
Here’s how the 2018 bottom looked like.
First it was verbal support from Beijing. Then the real policy action. Then a second bottom for stocks.
So it was a double bottom before a sustained rally.
Look at the MSCI China ETF.
You can pull up any other China index and it looks broadly the same.
You get a big policy speech (first blue arrow) that marks the first bottom. Some policy action follows. And then a double bottom.
So… is a sustained rally to follow?
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Why China stocks are a falling knife
That being said, I know many of you think that China is “uninvestible”, and would not touch it with a ten foot pole.
1. China is turning inward
The crux of the argument usually goes like this (or some variant of it).
Xi is a power crazed tyrant.
He is taking China away from the path of opening up that started with Deng Xiaoping.
The new China is inward looking.
Private entrepreneurship is forsaken in favour of “common prosperity”.
The rich in China are all trying to move their money out and running away.
China will never grow into a superpower, and money invested in China is money down the drain.
I mean – It’s true, this is a possible interpretation of what is happening.
2. COVID Zero + Real economic problems
On the economic front, things are looking equally dire.
A commitment to COVID zero means that we’re likely to see start-stop reopenings across China for much of the year, at least until the Party Congress.
Social and Political stability will be prioritised, economic consequences be damned.
Real estate bubble is Lehman 2.0
At the same time, you have a real estate bubble that is deflating.
We’ve covered this to death on Financial Horse, so I won’t belabour the point.
Long story short – the China developers are slowly defaulting one by one, in what looks like a slow motion train wreck.
Consumer sentiment is very poor.
All while China is trying to transition their economy into high tech manufacturing, and consumption driven.
Economically, there’s not a lot to look forward to.
3. Inflation is a real problem for China
China is a major commodities importer, so the rampant inflation is a real problem for them.
So far at least, China has weathered it well by maintaining a strong yuan.
The problem though, is that other countries are not playing ball.
Japan, which is a major competitor with China, has a currency that is dropping like nobody’s business.
China is caught between a rock and a hard place here.
If they keep the yuan strong, they lose competitiveness to Japan and the rest of Asia. If they weaken the yuan, it will drive inflation domestically (and possibly spark off a currency war).
The old timers will remember this during the Asian Financial Crisis.
Currencies across Asia fell one by one. And China holding strong on the Yuan was one of the key bastions of strength.
Well 25 years later – and a hawkish Federal Reserve threatens to repeat the same thing again.
Only this time, China is many multitudes bigger than they were back then.
Watch this space closely.
A big move in the Yen or the Yuan, will have repercussions for all of Asia.
Will I invest $1 million in China stocks in 2022?
The beauty about investing, is that you do everything you can to gather information on a topic.
And then based on the information at hand (which is likely to be imperfect), you need to make a judgment call on how the future is likely to play out.
Most people think of investing as mathematics, a problem to be “solved”.
In reality investing is more like poker.
A complete amateur may win 50% of his bets.
A pro like George Soros may win 55% of them.
And sometimes the difference between the pro and the amateur, is knowing how much to bet, and knowing when not to bet.
What is my personal view on China Stocks?
My gut feel here – is that I think China stocks have bottomed.
Don’t know how to explain it too.
I’ve shared with you the 3 strongest reasons both ways above, and based on this my view is that we may have bottomed.
But – Am I willing to bet a million dollars on it?
My capital is limited too, and as much as I want to throw a million on China stocks, a million on US Tech, and a million on Singapore REITs, in real life I need to choose where to deploy my limited funds.
What happened to China… will happen to the West?
I know this is going to be an unpopular opinion, but my view is that what China went through the past 18 months, the West may need to go through as well.
After COVID, global central banks injected copious amounts of liquidity into the markets.
This gave us a stimulus induced sugar rush, with rallies in everything from meme stocks to crypto to SPACs.
The way I see it, either the West needs to (1) go through what China went through the past 18 months, or they need to (2) accept high inflation (and watch as the value of paper money gets eroded away).
You can see the difference in monetary policy.
On one hand you have the PBOC (China Central Bank) cutting interest rates. On the other you have the Feds and ECB raising interest rates aggressively.
So for now at least, what happened with China where they weaned off the post-COVID sugar rush, may have to happen with the West as well.
Of course my view is that after a period of pain, the West will eventually go down option 2 (and all hell will break loose).
But that’s a discussion for another day.
Will I invest $1 million in China stocks in 2022?
A lot of you have asked me when I would buy China stocks, what am I doing with my existing positions etc.
The short answer is that I haven’t really bought any China stocks for almost a year.
I did add to some of my positions in the banks and in real estate, but no big moves.
There are encouraging signs coming out of China, and I may look to change that going forward.
What China Stocks to buy?
Call me an old fashioned horse, but I still like the China banks and real estate.
Big 4 China banks at 50% book value and 7% yields, Offshore REITs with real estate in Tier 1 cities at 7.5% yield – I’ll take that any day.
But of course there is real risk of capital loss, so nobody is telling you to be an idiot and put in your life savings.
Certain consumer brands could be worth buying too for active investors, the China market is always a wild ride when things go up.
In any case, you can view my full China Stock Watch, with regular updates on when and what I buy, on Patreon.
Is China Tech worth a buy?
Tech is tricky.
It seems that after the crackdowns, Beijing wants to keep a tight rein on Tech.
Which means that comparatively tech may not be such a good investment anymore, because tech may never return to their pre-COVID days of rampant growth.
What did I say about China being ahead of the curve, as compared to the West?
That said, given how deeply oversold many of these names are, there could be an opportunity to trade in the short term.
Closing Thoughts: China is a tricky market to invest in
There’s no denying that China is a tricky market to invest in.
China is such an intricate and fast paced market, that for investors who have never lived in China, it’s very hard to understand the nuances.
Even for those who have lived there before, the knowledge picked up would be worthless after 1 year outside of China.
That being said, in a year where almost all central banks around the world are going to be raising interest rates – China stocks could be the one safe haven.
It’s been clear from the past 1 – 2 years that China stocks trade on their own cycle, separate from the rest of the world.
In the months to come, that could prove to be a very useful trait for investors.
As always, this article is written on 10 June 2022 and will not be updated going forward.
If you are keen, you can view my full China Stock Watch, with regular updates on when and what I buy, on Patreon.
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I think going forward China equities will warrant a lower multiple. One, is regulatory risk which you pointed out for tech companies. Two, there will probably be a geopolitical risk premium required to own Chinese assets. What happened with Russia has probability increased sensitivity to the tail risk of a “sudden stop” in one’s ability to hold assets in an “unfriendly” country.
Like you I stopped buying Chinese equities since late last year. Been buying the dip which just kept taking. Hands bloody from catching too many falling knives. Thought it prudent risk management to stop after the amount of capital I was prepared to commit got maxed out 🙂
Separately, what do you think of Chinese Telcos? Those pay good dividends as well and have been on my watch list, but have yet to take a deeper look.
Haha never looked too closely into the Telcos frankly. The yield is good, but like you said, this is China so one always wonder when you’re missing.
China REITs is another interesting one (the onshore REITs with infrstructure assets). They just obtained regulatory approval and only listed last year/this year. But all are doing very well at 3-4% yields, so even higher valuations than S-REITs.
Why they are doing so well when the other dividend plays like banks / Telcos / traditional real estate are languishing is probably worth exploring. Is it a policy driven thing, or truly the work of private markets?
I hold small positions in all the big 4 Chinese bank stocks plus BOCHK
I bought them during the early 2020 period and added some few months later
Still holding on and enjoyed three summer dividends although capital appreciation is not there so far except with BOCHK BANKCOMM
Overall not bad and these are long term holds
Not planning to add though
Caution and portion sizing is critical with Chinese investment
My Chinese tech is still down by 30%
I would rather deploy cash in the US and Sg blue chips safely than risk here
Agreed with this. They are great dividend plays, but there is always that tail risk.
With the right position sizing, I do think they have a place in a Singaporean investor’s portfolio though.
Do you ever consider the consider where one day much later China will face the same issues like the US now, hyperinflation, because of printing too much money to stimulate the economy, if it can happens to the US, surely it can happen to China as well ?
Just curious your views between the ishares MCSI China etf (mchi) listed in the US, vs purely HK tech etf, whats your view on it ? bet on all sectors on china vs purely on china tech ??
Yes of course. But I think the runway for China is further. This probably wont be a big issue for China until 10-20 years later?
Whereas for US, it is something that they will need to face in the next 3 – 5 years.
Yeah MCHI vs Hang Seng Tech is interesting. I’m inclined to say MCHI would probably be more appropriate for me given I am bullish on China dividend and consumer plays. But to each his own. The risk exposure for each is very different.
Thank you for the great article again. I have never invested in China tech stocks. Nevertheless, I agree that the worst should be over in terms of the regulatory crackdowns. So I guess it is an interesting time to enter. Having said that, it’s quite crazy to imagine one would pump in $1 million into China tech stocks. Haha, quite a click-bait title. Heehee.
Haha thanks for the kind words.
Not really though – it really depends on how much you start with. For HNWIs with $10 – $20 million stock portfolios, $1 million on China is actually not a big allocation!