By Emil Wolter
The recent moves by Chinese authorities are not unprecedented. In our view they represent, at worst, a temporary step back in a continuing process of positive evolution and development of the domestic Chinese stock markets.
In recent years these developments have included the introduction of a futures market, short selling capacity and foreign investment. It is unlikely that this path of progress will be significantly disrupted by these actions or even a possible (eventual) bear market.
While certain aspects of the measures, taken in a stock market which remains dominated by unsophisticated retail speculators, were clearly undesirable (the short-term application of trading suspension by many companies most obviously), others were very appropriate. In particular, ensuring that the use of leverage by “widows and orphans” was reduced and contained within regulated channels makes a great deal of sense.
The use of government reserves to buy equities through ETFs, if true, is hardly a unique case. Indeed, the history of government intervention in stock markets has been a feature not only of emerging stock markets but also the developed world – it was only in 2008 when authorities in Europe banned short-selling in a blanket fashion.
There is still a source of significant opportunity for long-term focused investors. We believe that short-term earnings-based valuations of Chinese equities are not excessive but more importantly, long-term indications of equity capitalisation, relative to the economy, suggest significant opportunities for growth.
Consequently, over the coming years and decades international investors will be forced to increasingly familiarise themselves with Chinese equities. This will not be an easy journey as many cultural and practical differences exist, however those who embrace the challenge are likely to be handsomely rewarded.
What is likely to drive the long-term growth of Chinese financial markets and their related importance to international investors is the structural reform measures designed to secure a more efficient allocation of capital across the economy via a reduced role of the state. While complex and multifaceted, ultimately these measures are becoming visible from an increasingly competitive domestic financial sector and a rapidly liberating capital account, to the detriment of banks.
Emil Wolter is investment adviser, Comgest Growth Asia Pac ex Japan, Comgest Growth Emerging Markets
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