HONG KONG, Nov 2 (Reuters Breakingviews) – Tuesday’s rally in Chinese stocks may have been based on rumours. But in the offshore markets, the discount on the value offered is so extreme that it makes betting on false hopes less risky than it would otherwise be.
The Hang Seng Index (.HSI) closed 5% higher on Tuesday after a post on Chinese social media claimed to show that Wang Huning, a key member of China’s Standing Committee and the country’s chief ideologue, had formed a ” Reopening Committee”. this would explore the easing of the harsh lockdowns implemented under President Xi Jinping’s so-called dynamic zero-Covid policy. This naturally suppressed economic activity, particularly in the services and real estate sector, so such a change would instantly revive growth and boost earnings for listed Chinese companies, most of which focus on the markets. nationals. The Shanghai and Shenzhen mainland stock exchanges recorded lesser increases; New York-listed Alibaba (9988.HK) closed up 7%.
Buying on scuttlebuts online might seem reckless, but less so when you consider how battered the offshore stocks of some Chinese companies are. Alibaba, at $67 per share on the New York Stock Exchange, is trading slightly below its 2014 IPO price. The average component of the S&P 500 (.SP500) is trading at 15 times its estimated forward earnings, while the Hang Seng China Enterprises Index (.HSCE) ratio is 5 times, according to Datastream. Down 34% since the start of the year, the Hang Seng is the second best performing global index after Russia. Shares of dual-listed companies sell in Hong Kong at half their onshore price, but this discount is a pipe dream because the shares are not mutually fungible, making arbitrage impossible. Even so, it underscores how skeptical foreign capital is of China’s story these days. Yields are obviously higher elsewhere and outputs are increasing. The question, however, is when investors see value in Chinese tech companies and embattled property developers.
One of the problems is that investors are terrified of President Xi Jinping. Because China’s offshore-listed corporate population is overweight internet companies, fintech and, in Hong Kong, real estate, they have suffered more from Xi’s various crackdowns than stilted state-owned enterprises who trade in Shanghai. However, it seems that the pressure is easing. If Beijing were to get the idea that it’s impossible to keep Covid-19 out of the country forever, there’s huge upside potential given the scale of the sell-off.
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Stocks in Hong Kong and China jumped sharply on Nov. 1 after rumors swirled that China was planning an easing of tough Covid-19 restrictions in March 2023.
An unverified social media note tweeted by influential economist Hao Hong said a “reopening committee” had been formed by permanent Politburo member Wang Huning. A Chinese Foreign Ministry spokesman later said he was unaware of the situation.
Editing by Antony Currie and Thomas Shum
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