Since the MSCI China Index hit a low on March 9, it has been moving up and down within a narrow range in the past few months, while A-shares have rebounded slightly. Nevertheless, internet shares have been dragging down offshore markets, including the Hong Kong stock market and the American depository receipts (ADR) market.

Looking ahead, I believe that whether China’s liquidity is in line with market expectations will be the key factor driving market developments. The Chinese government’s current objective is to properly control the leverage level of the overall economy, in particular the domestic real estate sector, and also to strike a balance for the growth momentum. As the main components of the Chinese economy are on a relatively high leverage level, we believe there is limited scope for further tightening the monetary policy in the foreseeable future.

Many companies have delivered encouraging business results of late. In the first quarter of 2021, most companies recorded profits that are within or exceed expectations. More importantly, as we are approaching the second half of the year, the stimulus associated with low-base effects have gradually eased, but many companies are still facing strong demand. Will rising prices of raw materials undermine companies’ profitability? Generally speaking, high-quality, leading listed companies have greater bargaining power so that they can shift costs onto consumers. Besides, they can control costs by boosting efficiency. Therefore, they don’t face that much pressure from rising prices.

Meanwhile, the rising renminbi is another focus of attention. The onshore and offshore exchange rates of the yuan have recently hit a high in three years. The offshore rate has even passed the 6.4 yuan-mark. Does that put pressure on some enterprises? Several years ago, the renminbi had been appreciating continually, but companies’ profitability was not affected much. That partly had to do with the rising cost efficiency of Chinese companies and the economy’s gradual transition to the manufacturing of high-end products, which offset the impact of the rising yuan. Besides, with China’s growing per capita income, Chinese consumers have become more demanding and can spend more on high-quality products. But of course, one cannot generalize things too much. For example, it is not easy for popular products to reinvent themselves. Therefore, the key is to be careful with what one chooses and to pick those that will win in the long run.

Regarding internet companies, we remain relatively cautious. For years, the market has been dominated by growth sectors, which include IT stocks. In the future, investors may still be on the lookout for companies with strong growth prospect, and so whenever the market adjusts itself, investors will be afforded a new investment opportunity. But unlike in the past when money flooded into the new economy sector, investors today are a lot more cautious. For example, some internet companies that face policy risks may not be able to attract a great deal of capital even if prices of their shares undergo adjustment. This has to do with market concerns over the risk posed by regulations, and the impact of related policies on technology companies have not been worked out yet.

(Chung Sau Ha is a senior portfolio manager with Allianz Global Investors.)

This article is translated from Chinese by Apple Daily.

Click here for Chinese version

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