China Stocks: A Strong How To For Disinvestment

When people are running for the exits, our natural instinct is to join them. Accordingly, Canada’s second largest pension fund is pulling back from China. The Caisse de dépôt et placement du Québec (CDPQ) has stopped private investment there. It will close its Shanghai office later this year. It is right to do so.

China’s economy is weakening. A technological Cold War with the US would curtail the gains from innovation. The government has troubled the investors by banning the business.

Singapore’s sovereign wealth fund GIC has also reduced investment in Chinese private investment. Canada’s third largest pension fund, the influential Ontario Teachers’ Pension Plan, has disbanded its China equity investment team.

Foreign investors sold Chinese shares in May. They sold $1.7bn in mainland shares after dumping $659mn in April, according to Refinitiv. The benchmark CSI300 index trades below 12 times forward earnings, a steep discount to global peers and well below its 10-year average.

The selling is the flip side of record net buying by foreign investors in January. Hedge funds bet heavily on the post-lockdown economic boom, which hasn’t materialised. Pessimists expect growth in the low single digits.

Growth opportunities are scarce. Local tech groups gave fat returns over the years. Since 2020, market saturation has eroded margins.

Shares of e-commerce conglomerates Alibaba and PDD are down more than 30 per cent since the beginning of the year. Promising fields such as AI could be left behind as US export controls reduce access to advanced chips.

The biggest problem is the wavering of faith in the economic policies of the government. China’s manufacturing activity shrank more than expected in May. April retail sales and factory output missed expectations. Property investment and industrial profits are down. Youth unemployment reached a record 20.4 percent in April, according to official figures, nearly quadruple the broader rate.

Government crackdown is another issue. Beijing has attacked everything from tech to tutoring. This makes it difficult to value investments. The problem is compounded by the suppression of critical financial analysis.

If Beijing liberalises the economy, stops interfering in trade and seeks rapprochement with the US, investment will pick up. But all three steps would be anathema to President Xi Jinping. The foreign return is expected to continue.

The Lex team is interested in hearing more from readers. Please let us know what you think about our view on China stocks in the comments section below.