Zurich-headquartered Julius Baer cautioned against investing in Chinese stocks and bonds based on historical assumptions about market efficiency, highlighting the shift towards common property and public sector dominance.
After a turbulent 2021 for Chinese markets, some financial institutions are turning positive due to a deep correction that has caused valuations to plunge alongside policy easing by Beijing.
But Julius Baer’s Asia Pacific head of research Mark Matthews warns against early optimism, underlining two key areas that could override the looser environment: China’s focus on common prosperity and advances by its public sector.
«I know many of the investment banks have become more positive on those sectors because they have lost so much value,» Matthews said in a recent virtual briefing. «But we haven’t become more positive.»
Common Prosperity
On the issue of common prosperity, Matthews noted that Chinese tech firms – even after a trillion-dollar rout last year – are unlikely to make a strong rebound.
«I don’t think those companies are going to want to show a lot of profits in the foreseeable future given the move to common prosperity,» he explained.
«You could say they have been de-rated [to levels] that one could consider cheap but the catalyst for them rising is elusive.»
China Property
And on advances by the public sector, Mathews pointed towards state-owned firms as a key buyer of distressed assets in the property market, in a move he described as surprising.
«We thought that when the property sector first started running into trouble, good quality, well-run private developers would be coming in and snapping up assets from the weak ones,» he said.
«But actually, it’s the state-owned enterprises that are taking control. So, it looks that sector is going to be much more public sector-dominated.»
«When in Rome»
According to Matthews, investors interested in China moving forward will need to shift their approach away from the conventional assumption that the private sector is better at allocating capital to generate returns.
«I have to be frank. Don’t expect to make money in China the way you do in other countries because it’s clearly being run differently than before,» he said, advising investors to stay aligned with state policymaking.
«When in Rome, do as the Romans do.»
