China made no secret of its plans to address mounting debt risks at the 19th Party Congress last month. And yet, newly tightened rules for asset management, online lending and public private partnerships have spooked onshore markets. The CSI 300 Index has declined 5% since 22 November’s high. Bouts of China onshore equity risk have spilled over into global stocks in the past, most notably in June 2013, from June to August 2015, and January to February 2016.
But this time we do not see broader cause for concern:
- A mild retracement is unsurprising, in our view, given how much the market has risen. At their peak last week, onshore Chinese stocks had gained 27% this year, versus the S&P 500's 12.5% and the MSCI AC World Index's 13%. Despite last Thursday’s big fall, the CSI 300 declined just 0.4% over the week.
- Volatility in China reflects the unique dominance of retail investors, who account for nearly 80% of the onshore market capitalization. Even with efforts to open up China’s market, we expect institutional and foreign investors to still account for less than 15% of it for the next few years.
- Liquidity conditions are tighter and may be adding to the volatility. However, the central bank is carefully managing liquidity additions, which suggests prudent management.
So we take market volatility in onshore China as a sign that local investors are adjusting to renewed efforts to reduce leverage and financial sector risk, which we view as a long-term positive. We remain overweight offshore Chinese equities and confident that China jitters will not spread to global markets.
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