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Wealth Insights | Equities

It Won’t Be a Smooth Ride, but China is Turning Around

Since mid-May, China’s policymakers had staged a steady drumbeat of declarations to support the economy. By June, this has turned into a multi-ministry comprehensive action to turn the economy and markets around.

Investors have been disappointed repeatedly this year by false starts in policy, but the difference this time is that all major policy channels are working in the same direction. Investors should take a bolder step to add to Chinese equities to capture its potential outperformance in the second half. The recovery is likely to be bumpy, as there are a number of risks. But the path of recovery is likely to be a long one, with multiple areas of opportunity.

The policy updates have driven a 35% rally in the NASDAQ Golden Dragon China Index, outperforming most markets globally.

  • The most impactful development was the reported conclusion of investigations into online platforms for cybersecurity concerns. This could potentially reopen the Hong Kong market for IPOs for internet platforms and their potential spinoffs. The relevant apps are again allowed in app stores and able to take on new users that were previously banned. The media regulator approved 60 online games on Tuesday, which was the second batch of approvals since pausing last July.

  • There are several key implications from the recent policy changes: Resuming IPO market in Hong Kong (HK) is likely to attract additional liquidity to HK from both mainland and elsewhere; Regulations on anti-trust, fintech and data security have peaked. This does not mean easing, but it does mean that companies can plan ahead under a new normal for regulations; and policymakers may be trying to address unemployment among the youth and fresh graduates, which is a potential source of social instability if left unchecked.

Chart: Revenues of major Chinese tech companies

Portfolio Considerations

  • The recovery is likely to be broad based since the lockdowns hurt activity across the economy. This may cause short term outperformance in higher beta parts of the equity market. 

  • Internet platforms may see several catalysts, including progress in restructuring and potential for listing portfolio companies. They still must contend with earnings weakness in 2Q, so investors would be focusing on their guidance for 2H, which was absent from their 1Q results.

  • Infrastructure industries like cement and construction are likely to see continued support from stimulus measures, particularly as more local government special bonds are issued to support projects. These projects are likely to favor green development and energy and resources security.

  • Consumer industries are likely to be a key beneficiary of recovery, but also tempered by periodical relapses in COVID policy.

  • Revenue prospects may be improving in financials, particularly in securities and brokerage, as the equity market resumes its fundraising function after regulations and a long bear market sharply reduced activity over the past 1.5 years.

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