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China is tradable, but is it investable?

For China to become a portfolio investment, more of its economic growth must start accruing to equity investors

The world’s second-largest stock market, surging 25 per cent in just five trading days. Photograph: The Associated Press
Proinsias O'Mahony's picture
Proinsias O'Mahony
Mon Oct 07 2024 - 06:00

China is often described as uninvestable, but it’s certainly tradable. Huge government stimulus has driven a stunning rally in the world’s second-largest stock market, surging 25 per cent in just five trading days and going from a 52-week low to a 52-week high in less than two weeks.

Despite this, Chinese stocks remain “in the hole”, notes Bespoke Investment, with the Shanghai CSI 300 index still down over 30 per cent from February 2021′s post-Covid high and “essentially unchanged” over the past five years.

Therein lies the problem.

Chinese stocks periodically enjoy furious rallies, before then resuming their downtrend.

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Earlier this year, more than 40 per cent of those surveyed at a Goldman Sachs conference in Hong Kong believed China was uninvestable. Global investors were largely “out of China”, Goldman’s Timothy Moe told the Financial Times, adding that “if there’s a rally you can go back in [later]”.

[ European companies cool on plans to invest in China, report shows ]

In his latest Eye on the Market report, JPMorgan’s Michael Cembalest notes Chinese valuations are still “at the low end of the last 10 years”, but he believes China remains a trade, not a portfolio investment. For this to change, more of China’s economic growth must start accruing to equity investors.

Since 2010, China has had the worst pass-through from GDP growth to earnings and investor returns. “All of those ‘Bric’ research reports from 20 years ago totally missed the point,” says Cembalest. “Investors cannot live on GDP alone.”

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