Why there may not be good news for investors watching China

By Summer Zhen and Xie Yu

HONG KONG (Reuters) – Investors are stepping back from their exposure to risk ahead of the Chinese Communist Party congress in October and putting their money into the relative safety of mainland blue-chip stocks as they wait for signs that Beijing is ready to tackle the problems hanging over the economy.

The ChinaAMC China 50 ETF, the country’s largest exchange-traded fund, saw a nearly 30% jump in its assets this month, funneling more than 10 billion yuan ($1.40 billion) into Shanghai’s 50 largest stocks.

This is driven by what some analysts call the “Beijing situation”, which is the belief that authorities will keep markets stable before the 20th Communist Party Congress, which will be held on October 16.

But investors have little desire to bet on what happens after this event, which would see Xi Jinping appointed to a third five-year term as supreme leader and shuffle the staff into the decision-making Politburo.

It is a challenging time for the economy, as the authorities prioritize political stability over growth, the yuan is declining and global stock markets are selling off.

The investor’s position is remarkably conservative, with most of them betting on A stock, which is seen as more resilient and has the lowest correlation with the US and European markets.

They also hope that the problems currently hampering investor confidence, such as non-proliferation policies and stress in the real estate sector, will ease after Xi’s reset.

“We have been very defensive and cautious about China this year, and we are still weighing down on China, but what we are seeing are more positive indicators emerging,” said Robert St. Clair, a strategist at Fullerton Fund Management in Singapore.

St Clair says Fullerton loves A-shares as local companies listed in new technologies and industries can benefit from the country’s Shared Prosperity Initiative.

It’s hard for investors to avoid exposure to China, says François Savary, chief investment officer at Prime Partners SA, a Swiss wealth manager with about $4.1 billion in assets.

Key questions focus on what happens after Congress and whether Xi will pursue a reformist or conservative approach to economic management.

“Can Congress change everything, and can it stabilize the situation in China?” Safari said. “I do not think so.”

Remaining neutral is a safe option while there is uncertainty about what Xi will do more aggressively, he said, given Beijing’s recent efforts to clean up its real estate and technology sectors and its long-term desire for a more self-sufficient and equitable China. .

“Beijing mode”

Beijing Mode is already on.

Sources told Reuters that regulators have recently asked some fund managers and brokers to avoid massive stock sales ahead of Congress.

Indus Capital Partners, a New York-based investment manager, began reducing China’s exposure to Asian funds in 2021, but has since returned. China’s largest exposure only in its long-running fund, Indus Select of $1.37 billion, has increased modestly.

“I wouldn’t be under the weight of participating in this Congress. I don’t think China’s challenges are unprecedented in the world,” said Byron Gill, managing partner at Indus Capital Partners.

Swiss private bank UBP also re-entered China in August, accumulating A shares.

“There is some optimism that you will see a gradual easing of some of the COVID-19 restrictions that will provide at least some periodic support to the economy,” said Norman Villamin, head of information for UBP Wealth Management.

a Morgan Stanley (NYSE 🙂 A survey showed that 42% of investors surveyed in September had increased allocations to China over the past three months from 21% in May.

Some fund managers believe that Xi wants to quickly return to the business of supporting the economy.

Derek Lin, a portfolio manager at Boston-based Columbia Threadneedle Investment, which manages $598 billion, expects the Chinese economy to gradually return to normal when Xi begins his third term.

However, foreign flows were volatile, and most of them went to ETFs.

St Clair said: “Investors are in this ‘wait and see’ mode to get more clarity on the potential for stronger growth. This is where (Congress) results can come in handy.”

($1 = 7.1640)