China’s Economic Landscape Shifts: Investors Adopt Cautious Approach
As the world’s second-largest economy struggles to regain momentum, global investors are reassessing their stance on China. Gone are the days of grand narratives and long-term prosperity; instead, investors are adopting a more modest view, seeking quicker payoffs and smaller bets.
Fading Conviction and Policy Uncertainty
The lack of investor consensus and increasing policy uncertainty have fundamentally changed the way analysts and money managers see China’s domestic markets. The benchmark Chinese stock index, which surged 40% in two weeks last September, has since lost half its gains. The yuan, though lately enjoying a fillip from a dip in the dollar, is not far from post-financial-crisis lows.
A Trading Market, Not an Investment Opportunity
“People basically take China as a trading market,” says Goldman Sachs’ China equity strategist Kinger Lau. “If they see the catalyst, they will come in, but after a short period of time, they will sell and take profits.” Lau is positive but says clients want to “wait and see,” awaiting clarity on both President Donald Trump’s plans on China and Beijing’s response.
Fraught Outlook and Volatile Macro Environment
Making things harder for traditional long-term investors is an increasingly volatile macro outlook. While Trump has started his term with a softer-than-expected stance on China, most expect a tariff hit is on the way. Meanwhile, a detailed Chinese stimulus plan remains elusive. HSBC’s head of Asia research, Joey Chew, says domestic issues and external risks mean the outlook for the currency is “very tricky.”
Policymakers Face a Difficult Task
Chinese policymakers face a difficult task anchoring market expectations. The central bank must balance interest rates, keeping them low enough to encourage growth but not so low as to drag the currency to ever deeper multi-month troughs. Earlier this month, People’s Bank of China Governor Pan Gongsheng said rates and bank reserve rules would be adjusted to supply liquidity, in what markets saw as a hint that the bank would cut rates.
Some Investors See Opportunities Amidst Uncertainty
Despite the uncertainty, some investors say Chinese markets are still relatively cheap, with a forward price-to-earnings ratio around 11 for the Shanghai Composite compared with 22 for the S&P 500. “It’s not for everyone,” said Ken Peng, head of Asia Pacific investment strategy at Citi Wealth. “But I do think that China is going to be a very rich source of alpha for this year.”
Others Advocate Caution
Others see unpredictability as reason to avoid stock picking. “Things can change quickly,” said Karsten Junius, chief economist at Switzerland’s Bank J. Safra Sarasin, which has a neutral position on Chinese equities. “What we recommend is not trying to pick the winner. We cannot in advance, identify sectors that might either be favoured by the Chinese authorities or fall out of favour.”
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