The Economist
Oct 27, 2024 08:00 AM IST
The debate about “uninvestability” obscures something important
Nothing changes sentiment like price, according to one investing maxim. The world-weary saying reflects the fact that after a stockmarket surge speculators usually scramble for reasons to believe further price rises are on the way. A recent surge in the Chinese market is one such example.
On September 13th the CSI 300 index, made up of the largest stocks listed in Shanghai and Shenzhen, was at its lowest in five years. Since then it has gyrated wildly, rising by as much as 35% and then falling by 11%. Stocks are being buffeted by waxing and waning expectations for stimulus from the central bank and the government. On October 12th China’s finance ministry pledged that it would boost consumption and shore up support for struggling local governments, although it fell short of putting a precise figure on such spending.
So has a new dawn broken over Shanghai and Shenzhen? Investors would desperately like an end to three years of misery, during which time Chinese stocks have been battered by a property crisis, the government’s turn against parts of the private sector and an increasingly fraught relationship between Beijing and Washington. A debate about whether Chinese stocks are in reality “uninvestable” has roiled since 2022, when JPMorgan Chase, a bank, published (and subsequently withdrew) a briefing note suggesting as much.
What it means for a stockmarket to be uninvestable has always been a little uncertain. JPMorgan did not intend for its provocative turn of phrase to refer to the Chinese market in perpetuity. Alex Yao, the analyst responsible, was referring to a particular moment of political uncertainty, which he and his colleagues expected to last for 6-12 months. This year he has been much more optimistic about the country’s tech firms.
Some investors are undoubtedly finding the market investable. Chinese equity funds saw their largest recorded inflows in the week ending October 9th, according to epfr, a data provider, with almost $40bn flooding in from investors at home and abroad. Moreover, there is plenty of room for foreign allocations to grow. Goldman Sachs, another bank, believes that were allocations to return to levels proportional to the size of the Chinese stockmarket, it would mean another $48bn flowing into the country.
New arrivals will also find Chinese stocks to be far more investable, in the technical sense, than they have been previously. In July 85 exchange-traded funds that are listed on the mainland were made available through the Stock Connect system, which links mainland exchanges with Hong Kong. The quotas and limits on purchases of stocks by so-called qualified investors were removed four years ago, and recent rule changes have made hedging currency risk easier, too.
But the question for most investors is simpler: is buying Chinese stocks a good idea? Even as speculators reap quick returns, for those who wish to buy and hold the answer is clearly still “no”.
Whatever the deeper problems with Chinese markets, a lack of economic growth is not among them. In fact, mainland stocks have been an abysmal way to benefit from the astonishing growth of the world’s second-largest economy. The CSI 300 index has risen by less than a quarter in the past 15 years, while China’s nominal GDP has quadrupled.
The deeper problems include poor corporate governance, a high share of state-owned firms and the government’s habit of blindsiding investors with policy shifts. A campaign in 2021 against firms in education and technology was one such shift. Officials have made encouraging noises about the private sector recently, but it is hard to be confident there are no more value-destroying campaigns in the offing—a situation that cannot be resolved by stimulus and a burst of consumption growth.
Even recent improvements in market conditions demonstrate this point. Reading the runes for changes in policy is an all-important skill when investing in a country with a closed-off political system. For investors who get such Kremlinology correct, the rewards can be enormous. Yet most will never manage to do so, and will lose money trying.
Perhaps it would be better if the debate about the uninvestibility of Chinese stocks was retired. Its terms are unclear and, in some ways, China is becoming more accessible. Still, that does not change the most simple—and most important—analysis. For most potential buyers, Chinese stocks are simply not a worthwhile investment.
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