Chinese mainland equity markets have been under sharp pressure early this week, rumoured to be due in part to China Securities Finance Corp stepping back after a period of support. The local market was down over 8% on Monday, its biggest fall since early 2007, and closed down a further 2% on Tuesday after a volatile session. Chinese markets peaked in early June after a stellar run and have since lost close to 30% (though they remain in positive territory year-to-date). The Government had initiated several market-supporting policies to stem the initial fall, though the concern is that this latest episode suggests that their control is being tested.
The rise and subsequent fall has been exacerbated by margin lending from both official channels, but also from non-official ‘peer-to-peer’ lenders. While the outstanding amount of official margin loans has fallen by nearly a third since its peak in early June, it still remains at a challenging level and sentiment remains fragile. The knock-on impact on the economy and more broadly remains uncertain at this point, though a further sustained fall could impact.
The longer term story in China remains more positive as the Government looks to shift the engines of economic growth away from an over-reliance on fixed asset investment and towards domestic consumption. However, periods of transition can be difficult in the short term and markets can be volatile, particularly in markets that lack transparency.
We think that the long term opportunity in certain sectors remains early stage and attractive, particularly those sectors that are exposed to the increasing emergence of China’s Middle Class. Some reports suggest the middle class could grow to nearly 50% of the population by 2020 from just over 10% in 2009. As income per capita grows, aspirational demand will also increase. This will benefit well-placed stocks in, for example, fashion, food, financial services, including insurance, and services more broadly. These stocks are accessible to investors, but require a more direct route – having said that, our preference remains for stocks listed in more developed markets, like Hong Kong, rather than via the local Chinese exchanges at this time.