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Under the Banyan Tree - How are global investors feeling about China?
25 Plays1 year ago
Herald van der Linde welcomes Steven Sun, Head of A-share Research, to the podcast to discuss investor sentiment on Chinese equities, which have seen a major selloff in recent months. Disclaimer: https://www.research.hsbc.com/R/101/RwxdNNr. Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Podcast Introduction
00:00:00
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:11
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Make sure you're subscribed to stay up to date with new episodes.
00:00:14
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Thanks for listening, and now on to today's show.
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This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
00:00:22
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However you're listening, analyst notifications, disclosures, and disclaimers must be viewed on the link attached to your media player.
Investor Sentiment on China
00:00:38
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Hello from Hong Kong and welcome to another edition of Under the Banyan Tree, where we put Asian markets and economics in context.
00:00:45
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I'm Harold van der Linde, Head of Asian Equity Strategy at HSBC.
00:00:49
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On today's show, we're asking how global investors are feeling about putting money into mainland China.
00:00:54
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A few people are better placed to talk about this than my guest this week.
00:00:58
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That is Steven Sun, our head of Asia Research, or that's the Onshore Markets, and he just completed a worldwide tour meeting with dozens of investors engaging their views on mainland Chinese equities.
00:01:10
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How confident are they feeling?
00:01:11
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And what is the Chinese government doing to help?
00:01:14
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Let's get the conversation started right here under the Banyan Tree.
00:01:27
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Let's start with some customary context on today's topics.
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It's no secret that foreign flows into China dipped last year.
00:01:34
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An uneven recovery, severe property weakness and geopolitical tensions with the West have all dented global investor confidence.
00:01:41
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But with a little help on the policy front, the narrative is changing and global investors are once again ready to make moves in the onshore Chinese market.
00:01:49
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Indeed,
00:01:50
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Our own research found that 92% of all the funds that we look at, and this is well over 10,000 funds in February, actually bought Chinese equities, added to their exposure.
00:02:04
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Now, I want to emphasize we are here today to talk about investment trends, specifically equity flows.
00:02:11
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We're not here to suggest where people should put their money.
Government Policy and Market Sentiment
00:02:14
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And if you are going to invest in China or any other market or any other stock, be sure to take into consideration factors such as macro uncertainty, valuations, geopolitics, and so on.
00:02:27
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On that note, it's time to welcome Stevenson, who joins us from Shenzhen in southern China.
00:02:31
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Steven, welcome to the podcast.
00:02:33
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Thanks for having me, Harold.
00:02:35
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Steven, there's a couple of things that are moving in the right direction in China.
00:02:39
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At least they're not as bad as what people anticipated.
00:02:41
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We've had earnings results coming through pretty much better than most investors had anticipated.
00:02:47
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The property sector is, of course, still struggling, but that's well known and not so much of a drag.
00:02:52
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This year, as it was last year, we've seen some policy stimulus coming through from the government as well.
00:02:59
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Would it be fair to say that for all those reasons, sentiment is improving?
00:03:04
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That's correct, Harold.
00:03:05
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I just came back from a three-week global marketing in US, Europe and the UK.
00:03:10
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And also I attended our inaugural Global Investment Summit.
00:03:14
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Altogether, I've met with close to 100 global financial institutions.
00:03:19
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And I have to say, majority of the conversation would be focusing on, should they add China from a technical perspective, given the valuation and performance considerations?
00:03:31
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I have the same impression, Stephen.
00:03:34
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A lot of people are what we call underweight on China, so they don't have a lot of China.
00:03:37
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They sold their exposure in China, but they feel this might be a time maybe to reduce that.
00:03:43
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So it's not that they're making a big bet on it, but they're going towards a more what we call a neutral position on China, more in line with the benchmarks.
00:03:50
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Now, if that is the case, do we then see that being reflected in the flows in the unsure Chinese markets, Stephen?
Foreign Inflows and Stock Connect
00:03:57
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Yes, post the government's intervention through ETF subscription, it's quite encouraging to see that the Northbound inflows into China, foreign funds, their inflows are coming back.
00:04:10
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40 billion, 50 billion RMB for the past six weeks of time.
00:04:15
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That's interesting.
00:04:15
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And you say you've looked at the northbound flows.
00:04:18
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And just to clarify, the northbound flows are the flows that's really people globally, for example, that buy stocks that are listed in Shanghai or Shenzhen.
00:04:26
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But you can actually purchase them on the Hong Kong Stock Exchange through a program called Stock Connect.
00:04:32
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And if you do that, you therefore, the money moves on paper, on a map, it would move from Hong Kong to Shanghai.
00:04:38
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So it goes northbound.
00:04:39
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That is what you mean with northbound, right?
00:04:41
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As again, southbound, where mainland Chinese investors can buy stocks in Hong Kong, but they do the transaction on the Shanghai market.
00:04:51
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Is that correct?
00:04:52
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You have explained this crystal clear, Harold.
Focus on Core Chinese Assets
00:04:55
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Excellent.
00:04:55
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Well, thank you very much for that.
00:04:57
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Now, do you think a lot of these investors, are they looking at all the stocks in the market or are they really zooming in on a few stocks in Shanghai or Shenzhen?
00:05:07
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Yeah, almost half of the inflow are concentrated in the so-called core assets, i.e.
00:05:14
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stocks and sectors previously before the sell-off, they liked a lot.
00:05:19
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such as CATL, for instance, which is the largest EV battery manufacturer globally, such as Mao Tai and Wu Liangye, the two most famous white liquor brands in China, such as Media, which is the largest home appliance manufacturer in China as well.
00:05:42
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And last but not least, China Merchant Bank, which is a well-known household banking brand in China.
00:05:49
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Okay, so they really concentrate on a handful of names in the Shanghai market and focus on that.
00:05:56
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And I can see why that would be the case, because over COVID, a lot of people were not able to travel.
00:06:01
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And therefore, if you don't travel, you don't meet other companies, then you stick a little bit now to what you know.
00:06:06
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So maybe that might change over time, I guess.
00:06:10
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What is interesting as well, I guess, is we see that these foreign funds are more interested in onshore Chinese stocks.
00:06:17
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But what about the companies themselves?
00:06:19
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Sometimes they are in the market to buy their own stock as well.
00:06:24
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Do we see that?
00:06:25
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Do we see share buybacks increasing in mainland China?
Share Buybacks and IPO Guidelines
00:06:28
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We're seeing share buyback activities going up sharply in the first quarter of this year, close to 90 billion RMB in terms of total amount, which is roughly tripled compared to
00:06:44
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So there's a significant increase.
00:06:46
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Now, this is all very interesting.
00:06:47
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So we see a shift in sentiment, a shift in the flows in China.
00:06:51
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It's still focused on a few markets.
00:06:52
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And we also see that actually the corporates themselves now say, we're buying some of our own stock back.
00:06:58
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And this is important because if they cancel those stocks, then there are fewer stocks outstanding.
00:07:03
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And that means that any shareholder in that particular company automatically lets a larger stake in that company.
00:07:09
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So you get a larger proportion of the dividends.
00:07:11
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So
00:07:11
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That's all very, very interesting.
00:07:13
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So there's a sentiment in the market.
00:07:15
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I'd like to take a quick break here, Stephen, and then come back and see what the government is doing to maybe build on that particular sentiment.
00:07:22
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Sounds good.
00:07:33
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Well, Stephen, we're back looking at the onshore Chinese stock market.
00:07:36
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So Shanghai and Shenzhen really, but Shanghai is the real big one that most people focus on.
00:07:42
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There's a shift in sentiment and flows in that market.
00:07:45
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It's all very interesting.
00:07:46
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But there's been some announcements from the government as well.
00:07:49
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And I think that's quite important because it looks like they're doing this every 10 years.
00:07:52
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And the announcement is about a nine point sort of guideline.
00:07:56
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Can you talk me a little bit about what is that really?
00:07:59
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And is this really important?
00:08:01
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Yes, the key aspect of this guideline I concentrated on first and foremost to tighten up, lift IPO requirement.
00:08:12
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If you look at from a net profit perspective, from operational cash flow perspective, they have nearly doubled the requirement pretty much across the board.
00:08:23
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And secondly, it's encouraging companies to pay higher dividends and pay frequent dividends, i.e.
00:08:31
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quarterly or at least before Chinese New Year.
00:08:35
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And thirdly, encouraging share buyback, more importantly, cancellation of share buyback.
Regional Investment Trends
00:08:42
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Last month on the list, streamlining delisting requirement.
00:08:47
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And all of this comes back trying to address one core and the chronicle issue in the A-share market that is excessive equity offering and together with that EPS dilution.
00:09:02
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This is all very interesting.
00:09:03
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So because China is putting these IPO and all these regulations in place in order to, yeah, make it, create confidence with investors that, for example, if you buy a company, that these companies are not doing too much in terms of issuing more shares.
00:09:18
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You get what we call diluted, right, in your holdings, or that you get regular dividend flows as well.
00:09:25
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This is also interesting in terms of what I see in the rest of the region because in Japan and Korea,
00:09:30
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There are activities from a different sort of dynamic, but also, I would say, a focus on trying to pay more dividends, do more share buybacks, cancel these shares, and these sort of things.
00:09:41
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So clearly, China is not alone in this particular field, but Japan is doing this already, and there are now increasing noises coming out of Korea that there the regulators would like to put something in place that also allows or forces companies to follow on a very similar sort of trajectory.
00:10:00
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So, kind of a regional kind of theme, I would actually say, that's developing here.
00:10:05
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Very interesting.
00:10:06
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Now, with that, I think we're coming to a
Regulatory Measures and Market Confidence
00:10:09
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close.
00:10:09
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There is a shift in sentiment, but I'd say maybe it's from two fronts.
00:10:12
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It's one hand from the market itself.
00:10:15
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The invisible hand is saying, hey, we see flows coming back into mainland Chinese markets, Shanghai and Shenzhen.
00:10:23
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But it seems that the regulator there is also putting things in place in order for people to feel more confident to step into these stock markets.
00:10:31
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All very interesting, Stephen.
00:10:33
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And thanks for being on the podcast to talk us through all these complexities.
00:10:38
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Thanks for having me again, Harold.
Conclusion and Podcast Subscription
00:10:42
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Well, we're going to have to wrap it up here, folks.
00:10:44
Speaker
Another great conversation here under the banyan tree.
00:10:47
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Remember to like, listen and subscribe on Apple, Spotify or wherever you get your podcast.
00:10:53
Speaker
And we'll catch up again next week.
00:11:05
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:11:08
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We hope you enjoyed the discussion.
00:11:10
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