- Allianz Global Investors still sees a long-term case for investors to stay with Chinese stocks despite China’s regulatory crackdown.
- The firm made a case to stay invested in China, including attractive returns and diversification opportunities.
- Alibaba and Tencent shares have been hurt by Beijing’s swift regulatory changes.
- See more stories on Insider’s business page.
China’s crackdown on companies ranging from technology makers to video game publishers has led to losses of billions of dollars in Chinese stocks in recent months, but there are still reasons for investors to stick with the stock market of the world’s second-largest economy, according to Allianz.
Shares of e-commerce heavyweight Alibaba, tech and entertainment conglomerate Tencent and New Oriental Education, and others been have knocked down this year as Beijing regulators impose restrictions and rule changes that hit the way the companies conduct business. The Chinese government is on a campaign to reform a wide range of business and social practices including limiting the amount of time kids can play video games each week.
The regulatory crackdown has ramped up since late 2020 after Alibaba’s Jack Ma made comments critical of some Chinese institutions, leading to the withdrawal by his Ant Group’s IPO. This week, billionaire investor George Soros criticized BlackRock, the world’s biggest asset manager, for pushing heavily into China.
“Although recent news out of China has understandably unsettled the markets, we don’t think it changes the long-term investment case. Volatility goes hand in hand with China’s higher long-term return potential,” said Allianz Global Investors in a commentary piece published this week. “Understanding the dynamics at play can help make these changes easier to take in stride.”
Here is Allianz’s case for staying invested in Chinese stocks even in the face of regulatory headwinds.
1. China equities have always exhibited higher volatility – and outsized returns
Allianz said Beijing’s regulatory crackdown highlights the different risks and greater unpredictability investing in China has compared with Western markets.
“But investors have historically been rewarded with long-term outperformance. Indeed, an investment in the MSCI China Index from January 2000 to the end of August 2021 would have generated a 402% return,” the firm said. In the past, volatility has served as buying opportunities for many long-term investors.
2. Chinese stocks don’t move in lockstep with other equity markets
The country’s equity markets are useful as a portfolio-diversification tool. China A-shares are renminbi-denominated stocks in companies based in mainland China that trade on the Shanghai or Shenzhen stock exchanges. The A-shares have a correlation of 0.32 with global equities over the last 10 years, meaning they move in different directions almost 70% of the time, the firm said.
“Holding A-shares in a global portfolio may help generate a better risk-return profile,” it said.
3. Foreign investors are still buying China equities, despite recent turmoil
August marked the ninth straight month of positive flows for A-shares, which suggests a “buy the dip” mentality among global investors. The Chinese government has been fostering greater cross-border investment with the launch of the Shanghai and Shenzhen Stock Connect programs 2014 and 2016, respectively, the firm said.
In so-called “southbound” trades, mainland China residents use the Shanghai or Shenzhen exchanges to purchase Hong Kong-listed stocks. In “northbound” trades, investors outside of mainland China can use the Hong Kong exchange to buy A-shares in Shanghai or Shenzhen.
Vanda Research, which tracks activity among retail investors, last month said retail purchases of US-listed Chinese stocks hit their highest in five years. Net purchases of American depositary receipts of Chinese companies had surpassed $400 million, led by buying of Alibaba shares.
Allianz also pointed to a handful of other factors that investors should consider when thinking about whether to invest in China’s stock market. They include the fact that China’s equity market offers multiple options for investment, and China’s A-shares were less affected by recent volatility. Also, major global indices are adding large numbers of Chinese stocks, while innovation and transformation are driving China’s growth story.