Jack Ma was responsible for Alibaba's 2014 debut on the NYSE. Andrew Burton/Getty Images
Allianz Global Investors believes that there is still a long-term reason for investors to continue holding Chinese stocks, despite China's recent regulatory crackdown.
The firm argued that China was a good place to invest, with attractive returns and diversification possibilities.
Tencent and Alibaba shares were hurt by Beijing's rapid regulatory changes.
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China's crackdown against companies, ranging from technology manufacturers to video game publisher, has caused losses of billions in Chinese stocks over the past months. However, there are still reasons to stay with the stock market in the second-largest economy in the world, according to Allianz.
As Beijing regulators put restrictions on the business of the companies, shares in Alibaba, Tencent, and New Oriental Education have fallen. China's government is attempting to reform many business and social practices, including the time that children can spend playing video games every week.
Since late 2020, the regulatory crackdown has intensified after Jack Ma of Alibaba made remarks critical about some Chinese institutions. This led to Ant Group's IPO withdrawal. BlackRock, the largest asset manager in the world, was criticized by billionaire investor George Soros for attempting to push heavily into China.
"Although China's recent news has unnerved markets, we don’t believe it will change the long-term investment case. In a commentary piece, Allianz Global Investors stated that volatility is a natural consequence of China's high long-term return potential. Understanding the dynamics can make it easier to accept these changes.
Here's Allianz's argument for remaining invested in Chinese stocks despite regulatory headwinds.
1. China equity investments have shown higher volatility and larger returns in the past.
Allianz stated that Beijing's regulatory crackdown highlighted the differences in risks and greater predictability of investing in China compared to Western markets.
Investors have been historically rewarded for long-term outperformance. According to the firm, an investment in MSCI China Index between January 2000 and August 2021 would have yielded a 402% return. Many long-term investors have used volatility in the past to buy opportunities.
2. 2. Chinese stocks are not in lockstep with other equity market participants
The country's equity markets are useful as a portfolio-diversification tool. China A-shares, renminbi-denominated shares in companies based on mainland China, that trade on the Shanghai and Shenzhen stock markets, are renminbi denominated stocks. According to the firm, A-shares show a 0.32 correlation with global equities in the past 10 years. This means that they move in opposite directions nearly 70% of the time.
It stated that holding A-shares in a global portfolio could help to generate a better risk/return profile.
3. Foreign investors continue to buy Chinese equities despite recent turmoil
August was the ninth consecutive month of positive flows in A-shares. This suggests that global investors are embracing a "buy the drop" mentality. According to the firm, the Chinese government is encouraging cross-border investment through the launch of the Shanghai Stock Connect program 2014 and 2016 respectively.
For so-called "southbound trades", residents of mainland China use the Shanghai and Shenzhen stock exchanges to buy Hong Kong-listed stocks. Investors from outside mainland China can use Hong Kong's exchange to purchase A-shares in Shanghai and Shenzhen.
Vanda Research, which tracks retail investor activity, reported last month that retail purchases of US-listed Chinese stock stocks reached their highest level in five years. The net purchases of American depositary receipts from Chinese companies has surpassed $400million, primarily due to the purchase of Alibaba shares.
Allianz pointed out a few other factors investors should consider when deciding whether to invest in China’s stock market. These include the fact that China has multiple investment options and China's A shares are less affected by recent volatility. In addition, the major global indices have been adding large numbers Chinese stocks while innovation and transformation are driving China’s growth story.