China Syndrome


Our investment committee asset allocation weightings have been underweight China stocks since we started Tricio in early 2020. To be clear, we are by no means ‘anti-China’ as all three of Tricio’s principals have worked at banks that have heavy China/Hong Kong presences, clients and exposures. Our Chief Economist, John Calverley, is ‘old school’ with regards to measuring Chinese data and I remember his work from the mid-1990’s when electricity consumption was still being used as a gauge of economic activity. One of the best compliments that I received from a client was my China recommendation in the early 2000’s when I had suggested that her clients invest in currencies and commodities that China’s growth would demand, as investing in Chinese companies or assets themselves may have been too illiquid for her clients. What changed?


The increased debt loads that John has been warning about for the last few years along with the property developers crisis have not helped investment sentiment. We warned that Biden would not be changing the Trump tariffs and indeed ‘China bashing’ is about the only thing that Democrat and Republican lawmakers seem to agree on much of the time. The ‘politically pulled’ IPO’s of some Chinese firms in the US and the tough measures imposed on leading Chinese tech companies and owners by China has also soured sentiment. The Chinese ‘zero Covid’ policy has not helped growth prospects either, as both John and our Head of Investment Solutions, James Chu, have been pointing out in our research, blogs and webinars. The efficacy of vaccinations in mainland China is disappointing, which means that the risks of further lockdowns as variants spread is very high.


In one of our recent Monthly Insights we pointed out that if we could move below ‘underweight’ in our asset allocation, we would. By advocating individual EM country exposure and trying to avoid EM indices that could have over 30% of their weightings in China shares, we sought to inform our clients about the ‘hidden’ risks that they may not even be aware of. This included trying to point out the risks in US and European shares to China exposure last year.


The question now of course is ‘Does the recent tumble in some key China indices make China a value play or at least make them attractive on a ‘surely they can’t fall much further’ idea?’. Keep in mind that until mid-February this year some China indices were looking quite perky on a year-to-date measure compared to other markets. The view that China may have been able to avoid the US risk of the Fed tightening too much was catching on with some investors as well. The last month has been very difficult for Chinese shares though, and the risk is that sentiment may sour further.


One unexpected risk that is coming up in media and analyst reports now is the close trade ties with Russia that may act as yet another weight on sentiment. Global concerns about Russia’s attack on Ukraine have been translating into sanctions on some Russian banks, goods and key people, which also involves losing access to some money transfer systems. Many non-Russian companies have voluntarily suspended economic ties or dealing with Russian entities, including walking away from Russian branches and factories, in some cases. While Chinese firms made headlines by not filling Russian requests for airplane parts, there is a perception that by apparently still being willing to purchase energy exports and taking a ‘neutral’ stance on the invasion, China may be opening itself up to sanctions (or virtue signalling) in the future, as Russia’s largest single country trading partner. This may be unfair, given that other countries are also purchasing Russian energy exports. But, when investors are already jittery about investment prospects, negative news looms larger in their minds than usual, and positive news may get short shrift.


The top chart below shows the Hang Seng index on a weekly basis with the 13 and 50-week moving averages. The index is turning below the 2020 low which is not clever from a trend point of view. Even on a semi-log chart there is some ‘clear air’ below to the next support levels. The Hang Seng China Enterprises index chart at the bottom shows that this index of tech shares has been leading the broader index lower for some time. This leads to two thoughts. One is that if the HSCE continues to fall, then the 2008 lows may well be at risk of being approached (and the HSI may follow). The other is that if the HSCE does start to turn around, then this may be an early signal for HSI revival hopes. At the moment, one seems a lot more likely than the other. We will continue to keep an eye on China for our clients on the view that at some point we might see cause to raise our allocation weighting. We won’t be holding our breath though.


Gerry Celaya,

Chief Strategist