Why Chinese Stocks Might Shine Brighter In 2024

Why Chinese Stocks Might Shine Brighter In 2024
Reda Farran, CFA

about 2 months ago2 mins

China’s stock market has a reputation for being pretty insular, but – make no mistake – foreign investors hold plenty of sway over it. The Stock Connect program is proof of that. See, this program, which has linked markets in Hong Kong and mainland China for nearly a decade, is how international investors typically trade mainland shares. And its net flows are closely watched – as both an important barometer of global investor sentiment toward China and a predictor of onshore trading across the mainland.

A year ago, this gauge looked pretty encouraging, boosted by hopes for a post-Covid market revival. But investment flows soon headed into reverse as folks started to worry about a housing slump, rising geopolitical tensions, and more. In fact, foreigners have sold more Chinese shares than they’ve bought since August, when missed bond payments by property developer Country Garden exposed the depth of the real-estate crisis. That left the balance of foreign flows into Chinese shares at just 30.7 billion renminbi ($4.3 billion) for the year – the smallest annual amount since 2015. During better times, foreign investors would scoop up that much stock in a month.

All of this has left Chinese shares extremely out of favor. A Bank of America survey last month showed that Asia-focused fund managers had slashed their allocations to Chinese stocks more sharply than any others in the region. But on the flip side, it means there’s considerably more room for those global investors to increase – rather than cut – their exposure to the world’s second-biggest economy. And that decision may be made all the more tempting by the fact that Chinese stocks are very cheap, having slumped by almost 60% since early 2021. That dip has left the price-to-earnings ratio based on expected profits for Chinese companies below 10 – about half the global average. That said, cheap valuations have failed to be enough of a draw for these shares lately. Time will tell if 2024 proves to be different.

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