China A: Resilience in the eye of the storm

The China A market is up more than 25% year to date in USD terms despite the ongoing US-China trade dispute. While China’s economic outlook is likely to be clouded in the near term, the rising representation of China A stocks in the MSCI indices continues to be a positive structural factor that longer-term investors cannot ignore.

It is no secret that the US-China trade conflict has weighed on the Chinese economy. The latest macro indicators in July were a sobering read. The Purchasing Managers Index for new orders as well as new export orders stayed below 50 while property and infrastructure investments moderated. Weak auto numbers weighed on retail sales and worryingly, the unemployment rate has ticked up (5.3%). The NBS Manufacturing Purchasing Manager’s Index dipped to 49.5 in August, staying below 50 for the fourth consecutive month.

A closer look reveals that the impact on exports is not as bad as feared, for now. In fact, net exports contributed positively to GDP growth in the first two quarters of 2019, helped by an uplift in exports to ASEAN even as exports to the US fell. The 8%1 depreciation of the renminbi against the USD since February has also helped exports at the margin. Meanwhile, imports fell on the back of weak domestic demand.

Thanks for subscribing!

Follow us :

Surprising resilience

The China A market has been resilient despite the headline noise. The CSI 300 Index is up 28.9% year to date in USD terms2, beating the MSCI Asia ex Japan’s 6.8% gain. See Fig. 1. Interestingly, northbound flows have rebounded since June (See Fig. 2). Clearly, the China A market is holding up better relative to the March – December 2018 period where it fell 26.3%.

Fig. 1. China A market more resilient to trade conflict in 20193


Fig. 2. China A northbound flows rebound4


Quality over growth

While the Chinese authorities have eased on both the monetary and fiscal fronts to support the economy, it is noteworthy that they remain focused on promoting quality growth. While the People’s Bank of China (PBoC) has cut the Reserve Requirement Ratio and encouraged bank lending to small and medium sized companies, the central bank has not let up on shadow banking activities. Meanwhile, the trade tensions have not distracted the central bank from accelerating its interest rate reforms. The People’s Bank of China set the MLF (an open market operation tool) rate as the new policy rate in August to replace the previous benchmark lending rate. Longer term, the ability to establish their own loan pricing models should enhance the banks’ risk management capabilities going forward.

On the fiscal front, the Chinese authorities have also cut taxes and fees to stimulate the economy. The local governments accelerated their bond issuance this year to fund qualified infrastructure projects including shanty-town redevelopment, as well as highway and railway construction. By June 2019, local governments’ total net bond issuance reached RMB2.1765 trillion, accounting for 70.7% of the annual quota. That said, there are no plans for a massive investment stimulus similar to what was rolled out post the Global Financial Crisis. The government is also unlikely to ease property restrictions substantially given explicit statements from the politburo that “the government will not use real estate as a short-term means of stimulating the economy”.

A longer-term perspective

In the near term, until we get greater clarity on the trade front, the Chinese economy is likely to remain soft. Greater stabilisation efforts to support domestic demand and alleviate external pressures will probably be forthcoming should the economy decelerate too quickly. Earnings visibility is also expected to remain low. Meanwhile valuations are not demanding at the aggregate level, especially when considering that the risk-free rate is low and may get even lower. Policy support is also intensifying. The CSI 300’s 12-month forward price to earnings ratio is currently trading close to its lower bound, around one standard deviation below its long-term historical average.

For now, our investment team in China is focusing on sectors that have domestic drivers or may benefit from policy support. They are also favouring sectors/stocks that have sufficient valuation buffers given the ongoing uncertainty. These currently include the health care and consumer discretionary sectors as well as selected sub-sectors within the TMT (Technology-Media-Telecoms) sector. See Fig. 3.

Fig. 3. Sector valuations vary5


Investors, however, may not want to forget the positive structural drivers for the A share market. In March this year, MSCI agreed to increase the inclusion factor of A-shares in the MSCI China and MSCI Emerging Market indices to 20% in a three-step process in May, August and November, each time increasing the representation of Chinese large-cap stocks by 5%.

The latest move in August brings the weighting of China A shares in the MSCI China and MSCI Emerging Market indices to 7.8% and 2.5% respectively and can potentially lead to around USD22.7 billion of incremental capital to the market6. In our view, the demand for China A shares from global asset managers will continue to increase over the coming years, helping to underpin the market over the longer term.

Disclaimer Strictly Private and Confidential. For Institutional, Wholesale or Professional Investors Only. Not for distribution to the retail public. This document is produced by Eastspring Investments (Singapore) Limited and issued in: Singapore and United States by Eastspring Investments (Singapore) Limited (UEN: 199407631H).

This document is solely to be used for informational purposes only and is not intended for anyone other than the recipient. This information is not an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. This document may not be copied, published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments.

Information herein is believed to be reliable at time of publication but Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.

Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility. The information contained herein does not have any regard to the specific investment objective(s), financial situation or the particular needs of any person.

Where included, benchmark and index data included in this document are provided for illustrative purposes only. The portfolio and/ or services mentioned do not formally track any such benchmarks or indices and no representation is made as to relative future performance or tracking deviation. You should note that investing in financial instruments carries with it the possibility of losses and that a focus on above-market returns exposes the portfolio to above-average risk.

Performance aspirations are not guaranteed and are subject to market conditions. Higher yielding investments can produce income at the expense of capital growth or the capital value of the investment. High volatility investments may be subject to sudden and large falls in value, and there could be a large loss on realization which could be equal to the amount invested.

Eastspring Investments (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America. Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore is also registered with the US Securities and Exchange Commission as a registered investment adviser. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. In marketing Eastspring Singapore’s services, the Adviser’s employees also may make recommendations about securities that constitute investment advice. Eastspring US does not contract directly with any prospective client, nor does it have any discretion over client assets, nor does it trade, deal or direct trading in any security, client account or fund. Eastspring US does not receive or retain any assets or securities, nor does it serve as a custodian or direct any custodial decisions. Additional information about Eastspring Investments is also is available on the SEC’s website at