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Chinese Business
FAN YU is an expert in finance and economics and has contributed analyses on China’s economy since 2015. Fan Yu
A Boost to Chinese Stocks?
So far in 2022, the Chinese stock market has outpaerformed expectations.
After spending most of 2021 on the “uninvestable” list, Chinese stocks have been boosted by two external developments.
The year 2021 was punishing for most investors with mainland Chinese exposure. Besides China’s uneven economic recovery because of its restrictive COVID-19 policies, regulators spent the majority of the year cracking down on China’s real estate and technology sectors.
Heading into 2022, a few Wall Street analysts started recommending Chinese stocks, including bullish analysts at Credit Suisse and BlackRock. More than two months into the year, more support is coming from unlikely places.
The first is policy-driven. After a busy regulatory year in 2021 as the Chinese Communist Party (CCP) introduced new legislation restricting tech companies and forced the deleveraging of real estate developers, 2022 will likely be muted on the regulatory front.
Policy uncertainty is expected to subside in 2022, as Beijing has been delivering a message of stability across the board. No major policy actions are expected heading into this fall’s all-important CCP National Congress, where Chinese leader Xi Jinping is expected to be named to an unprecedented third term as general secretary of the Chinese Communist Party—the country’s de facto leader.
In addition, China’s sagging economy means that the People’s Bank of China (PBoC)—the country’s central bank—is likely to loosen monetary policy and increase liquidity. Compared to the U.S. Federal Reserve, which is expected to raise the U.S. benchmark interest rates a few times in 2022, the PBoC is expected to maintain a more supportive backdrop for mainland stocks.
A more unexpected boost came from Russia’s invasion of Ukraine in February.
As more of the Western world sanctions Russia’s economy, its companies, and its people for the ongoing Ukraine conflict, trade and cooperation between Russia and China are expected to significantly expand going forward. Even as Russia and its president, Vladimir Putin, have been condemned by countries in the west, China has been steadfast in maintaining its “neutral” relationship with Moscow.
In February during the Winter Olympic Games in Beijing, Xi and Putin agreed to increase bilateral trade to $250 billion. The two countries also unveiled a new energy supply deal that’s worth more than $120 billion.
Now, are those amounts set to be shattered?
Reuters reported that a Chinese state lender’s Moscow branch has seen a dramatic increase of interest in opening new accounts by Russian businesses.
Thus far there has only been anecdotal evidence, but it’s unsurprising that more Russian companies and individuals are seeking to do business with Chinese banks, given that they’re being increasingly shunned by the rest of the global economy.
Some Russian companies may be forced to transact in Chinese yuan for all foreign trade, as major Russian banks were removed from the global, U.S.-dollar-driven SWIFT messaging system.
This could turn out to be an unexpected boon for Chinese banks and industrial firms, as well as the yuan currency.
Mom-and-pop retail investors in China are already betting that closer trade between China and Russia will benefit some Chinese companies.
The Financial Times noted that amateur Chinese investors were speculating in so-called “Sino–Russian trade concept stocks.” The frenzied buying of certain little-known logistics companies has created isolated bubbles of industrial and commercial companies with valuation multiples rivaling tech firms.
What kinds of companies were being bid up?
An example is Jinzhou Port, which operates ports in China’s northern province of Liaoning. Its stock increased by more than 80 percent in the week following Russia’s invasion of Ukraine. The buying frenzy was so wild that Jinzhou Port had to issue stock exchange-mandated warnings against speculation, stating that the company hadn’t experienced material new business to warrant such massive increases.
Clearly, this type of frenzy warrants caution. Retail investors in China—in a highly controlled media environment—are likely less familiar with the consequences of the effect of U.S. sanctions on Chinese companies. The future may not be as rosy as they believe.
