International Investment Institutions Touting China’s Stock Market While Looking for More Takers

Outside the Shanghai Stock Exchange building in Shanghai on Nov. 4, 2020. Hector Retamal/AFP via Getty Images

International investment institutions are saying that the current valuation of China’s stock market is attractive just when the Chinese Communist Party (CCP) announced that it is establishing a stock valuation system with “Chinese characteristics.” Many believe that international financial institutions are expressing optimism about the Chinese stock market in order to attract buyers to enter the market to relieve the pressure they have been feeling.

CCP Introduces its Own Stock Valuation Theory

On Nov. 21, Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC), said at the 2022 Financial Street Forum annual meeting that it is necessary to “explore the establishment of a stock valuation system with Chinese characteristics” and that the Chinese state-owned listed companies should be the ones to do it. Yi said that the valuation level directly reflects the market’s recognition of listed companies and that the market should recognize the value of state-owned listed companies. On Nov. 23, the CSRC issued a document stating that it would promote the use of the capital market for resource allocation and business integration by state-owned listed companies and that more assets should be placed in listed companies.

On Dec. 2, the Shenzhen Stock Exchange and the Shanghai Stock Exchange issued a document stating that they would promote the return of the valuation of Chinese state-owned enterprises to a so-called “reasonable” level. At the same time, some international investment institutions said that the current valuation of China’s stock market is attractive and they are bullish on its long-term investment value.

On Dec. 9, Bloomberg reported that Morgan Stanley upgraded its rating on Chinese stocks from an equal-weight to an overweight position in its latest report, saying that a new bull market cycle in Chinese stocks is starting and recommended an increased allocation to offshore Chinese stocks. In mid-October this year, the investment bank also said publicly that it was a good time to buy Chinese stocks.

Goldman Sachs said the MSCI China Index could rise to 70 by the end of next year, and the CSI 300 could rise to 4,500, a 16 percent upside from current levels. The earnings per share growth of the two indices are 8 percent and 13 percent respectively, and investors are advised to increase their holdings in Chinese stocks.

Standard Life says now is an excellent time to buy Chinese stocks. Rene Buehlman, chief executive officer for its Asia-Pacific region, said that he can guarantee that Chinese stocks are not overvalued now and investors should return to China.

Major Shareholders of Listed Companies are Decreasing Their Holdings to Cash Out

Contrary to what the international investment institutions say, the major shareholders of China’s A-share and H-share listed companies are speeding up the pace of decreasing their holdings to cash out.

On Nov. 30, GIC Private Limited, an investment institution, reduced its Vanke H shares by 5.72 million shares, involving nearly HK$100 million (about $13 million); from Nov. 14 to 30, it cashed out more than 40 million shares, and its H shareholding ratio dropped from over 9 percent to 6.89 percent.

On Nov. 25, WuXi AppTec again issued an announcement that it would reduce its shareholding by no more than 65 million shares in the next six months. Based on the closing price of 81.94 yuan (about $11) on Nov. 25, it is estimated that the actual controller and related parties are to reduce the cash amount by about 5.3 billion yuan (about $730 million). Since the lifting of the restriction in May last year, the significant shareholders, including the actual controller, have cashed out about HK$7 billion (about $1 Million).

On Nov. 24, Prosus, a subsidiary of South Africa’s Naspers Group, announced that it had reduced its holdings of 79.8 million Tencent H shares, hence, Tencent’s share price fell by nearly 4 percent at the close of trading that day.

On November 17, Warren Buffett’s flagship investment, Berkshire Hathaway Inc., reduced its BYD H shares by 3,225,500 shares at HK$195.42 (about $25.13) per share, reducing its stake from 16.28 percent to 15.99 percent and cashing out HK$630 million (approximately $82 million).

According to statistics from the Chinese state media Economic Reference News, more than 60 shareholders of at least 30 companies have received regulatory fines for the so-called non-compliance reduction during the year. In November alone, nine A-share listed companies issued an apology announcement for shareholders and executives who violated the law by reducing their holdings, most of which attributed the reason for the reduction to “mismanagement.”

International Capital in China is Trying to Attract Takers

Bloomberg reported in early January that while the U.S. government has called on U.S. financial firms to pull out of China, Wall Street investment firms are actually looking for ways to deepen their cooperation with the CCP. Goldman Sachs, Morgan Stanley, and others are preparing to expand their presence in China this year. Data shows that foreign purchases of Chinese stocks accounted for 15 percent of total capital flows in the third quarter of last year.

The CCP is clearly on a path of confrontation with the world after its 20th National Congress in October, yet international investment institutions are still flaunting their dealings with the CCP.

In this regard, Hong Kong financial analyst Sun Xiaoji said during his YouTube program that this shows that the interests of some international investment institutions are still deeply tied to the CCP. Their strategy is to keep the prices of assets invested in China from falling too quickly. So these institutions must try to stay in as long as possible and look for takers.