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 The Shanghai Composite Index has tumbled by 32 percent since
mid-June, wiping out about $3 trillion in market value and ending a
rally that had previously seen the market double from its June 2014
low. In response, Beijing has cut interest rates and stopped the
trading of thousands of stocks, preventing some shareholders from
selling their positions in hopes of ending the downturn.
The measures have instead helped spread the rout to the Hong
Kong-based Hang Seng index, whose listings of so-called H share
companies are largely owned by foreign investors and trade at lower
valuations, fund managers said.
"You've had some misguided efforts to cushion the selloff and that's
ultimately led to the unintended consequence of making the situation
worse," said Charles Wilson, co-portfolio manager of the $2 billion
Thornburg Developing World fund who has been adding to his positions
in Chinese consumer, internet and utility stocks over the last few
days of the selloff.
The Hang Seng index fell 5.8 percent Wednesday, its biggest decline
so far this year. The index is still up 5.8 percent for the year to
date, while the Shanghai index is up 16.7 percent over the same
time.
Reuters contacted several prominent mutual fund managers, including
the $8.7 billion T Rowe Price Emerging Markets Stock fund, the $1
billion Columbia Global Equity Value fund, and the $76 million
Morgan Stanley Global Opportunity fund, who all declined to comment.
It's the widest selloff in China, home of the world's second biggest
economy, since the global financial crisis of 2008.
While it is unclear what will happen when Chinese markets resume
full trading, most fund managers and analysts expect there to be
further losses as sell orders move through the market.
Beijing has moved to curb new listings and extracted promises from
fund managers and brokerages to buy at least $19 billion in stocks
to provide support for blue chip shares. In addition, the China
Securities Finance Corp, the country's official margin lender for
brokerages, has raised its capital base to 100 billion yuan ($16.1
billion) from 24 billion yuan, in order to stabilize markets.
On Wednesday night in China, the securities regulator ordered
shareholders with stakes of more than 5 percent from selling shares
for the next six months in a bid to halt the plunge in stock prices.
OUTLOOK DEPENDS ON BEIJING
While U.S. investors say that they remain largely bullish that
consumer spending will expand and the fallout from the stock market
crisis will be limited to the relatively small upper class of
speculators that own A shares, every portfolio manager interviewed
by Reuters noted that additional policy changes by Beijing could
alter their outlook. At the same time, fund managers like Wilson say
the volatility and selloff is making the Chinese market more
attractive for long-term investors, even if the market has not hit
bottom yet.
Emily Alejos, portfolio manager of the $20.8 million Nuveen
Tradewinds Emerging Markets fund, noted that companies that focus on
domestic consumption in the country are trading at enticing prices.
"For a long-term investor, some of these valuations [in H shares]
are quite compelling," she said, adding that the steep declines are
not affecting her outlook for the Chinese economy because the losses
in wealth among the relatively small percentage of Chinese who own
stocks are not likely to dent the country's expected GDP growth of 7
percent.
Frederick Jiang, co-manager of the $724 million Ivy Emerging Markets
Equity fund, echoed that sentiment.
"If you look at the Chinese market, it's a bipolar market with the
high growth A shares trading at very expensive valuations and the H
shares trading below 10. It's probably the cheapest major market in
the world," he said.
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Jiang, whose fund has large positions in the H shares of Chinese
companies including Fosun International and Bank of China Ltd, said
that he did not see any evidence that the booming stock market
affected personal consumption levels in China apart from housing
prices in major cities and thus expects the effect of the market
decline on spending to be muted.
High levels of margin trading coupled with a frenzy among Chinese
investors for A shares - those small and mid-cap companies whose
ownership is largely restricted to domestic owners - sent valuations
above 50 times earnings this year. H shares, by comparison, trade at
approximately 10 times earnings.
To be sure, finding true price to earnings ratios and other
valuation metrics for Chinese companies can be difficult given the
scant accounting laws and other forms of investor protection
Stretched margin levels are one reason why Robert Bao, portfolio
manager of the $2 billion Fidelity China Region Fund, is most
worried about China's brokerage sector.
"What does this mean to their earnings and balance sheets?" Bao
said. "And they're very levered to the stock market."
Yu Zhang, lead manager of the $5.9 billion Matthew Asia Dividend
fund, said that the market decline could lead to more monetary
easing in China, which in turn would boost the appeal of
high-dividend paying stocks such as insurance companies.
"We're not sure how long this volatile period will last, but to me
the medium- to long-term outlook for China is still trending up," he
said.
POPULAR BET
The market plunge comes at a time when China had become an
increasingly popular option for both retail and professional
investors in the US.
Retail investors have sent $3.4 billion to China-focused mutual
funds and ETFs for the year to date, the largest amount since 2009,
according to Lipper data.
International funds, meanwhile, now have an average of 3.2 percent
of assets invested in China, up from 2.2 percent in 2012, while U.S.
large cap funds that own Chinese stocks have an average of 2 percent
of assets in Hong Kong listed companies, up from 1.3 percent in
2012.
Even as he expects those fund inflows to reverse course, Jiang, the
Ivy fund manager, said that Beijing still has further policy moves
to make in order to stabilize the market.
"When your house is on fire, you find a way to put it out," he said.
"Then you can talk about the market finding a natural bottom."
(Reporting by David Randall, Rodrigo Campos and Tariro Mzezewa.
Editing by David Gaffen and John Pickering)
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