Chinese stocks are not popular

A most interesting contrarian, oversold investment opportunity on my radar is the Hang Seng China Enterprises <equity> Index (“HSCEI”).

The HSCEI serves as a benchmark that reflects the overall performance of Mainland Chinese securities listed in Hong Kong.

Index constituents include Bank of China, Sinopec, Alibaba, Conch Cement, Geely Auto, CNOOC, China Mobile, ICBC, CITIC and Tencent.

With all the hoopla surrounding restrictions of where Chinese companies are permitted to list their publicly quoted securities, temporary mis-pricing is often what occurs at such a moment.

The HSCEI has declined 20% from its February 2021 peak.

Why would Chinese authorities ruin their ascension onto the global capital markets scene by restricting foreign capital interest and retarding their own companies seeking liquidity?

It doesn’t make sense and I think there is some type of smokescreen (tactic) behind the latest announcements which may include inflicting a little pain on U.S. investors or flexing a little (soft-power, economic) muscle.

Don’t lose sight of the larger part of a story. China wants to have a financial services and capital market industry similar to the Western World.

They are hiring ‘western’ skills and offering full banking licenses to ‘western’ firms, just so they can be ‘like us’.

It is in China’s interest to bid for foreign capital.

For example, China is the world’s 2nd largest bond market. Today, the foreign share of the mainland Chinese bond market is 3.5%, which has risen from 1.2% at the end of 2017.

Interest in Chinese capital markets (bonds or stocks) will continue to grow with news such as $300 billion to enter the bond market as a result of FTSE Russell officially adding China to its World Government Bond Index in October 2021.

In order to sniff out an investment opportunity, it’s important to filter or dissect the current ‘noise’.

July 8, 2021
by Rob Zdravevski
rob@karriasset.com.au

* not investment advice, just commentary