Chinese stocks, especially tech, have been facing waves of volatility as investors fret about economic and regulatory uncertainty. Anthony Okolie speaks with Haining Zha, Portfolio Manager, TD Asset Management, about the troubles facing China’s tech sector.
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- Chinese stocks have been facing increasing volatility thanks to concerns about economic and regulatory uncertainty. With more on this, we're joined by Haining Zha. He's a vice president and director at TD Asset Management. Haining, what's causing the recent volatility in Chinese equities?
- I would say it's not just one factor but rather a confluence of different factors that is driving the storm we are seeing now. First of all, to start with I think the overall macroeconomic background is pretty weak. For example, in December 2021 the retail sales, usually a very stable economic data point, grow only 1.7% year over year. That is pretty weak.
And on top of that, you also have real estate sector tail risk lurking in the background. For example, the real estate developer Evergrande still hasn't come up with a very successful restructuring plan. And furthermore, you also have two large shocks to the economy. Number one is COVID. As we know, China and the rest of the world has a pretty large COVID gap and this year the COVID case on the rise and spread to multiple cities, particularly for some of the big cities or economic hubs like Shanghai and Shenzhen.
And recently the outbreak of Russia-Ukraine war also get people concerned. Although China is not directly involved, the perception of growing risk of sanction is increasing among investors. So that's another tail risk.
And moreover, you will also have two regulation-related risk. One of them is US and the Chinese regulators still struggle to come to agreement with regard to some of the accounting regulations. And the noncompliance of Holding Foreign Companies Accountable Act is making some of the investors losing confidence in the Chinese ADRs.
And furthermore, you also, domestically, the tech regulation is not showing any signs of abating. So as you can see this is a long list of worries. Although the Chinese government is trying to be more proactive on a monetary policy side, but so far the easing is not big enough and fast enough. That's why we are seeing the volatility right now.
- Now, it seems that a lot of the macro weakness that we're seeing in China is driven by COVID-related economic disruptions. Will China continue to stick to this sort of zero-COVID policy? And will they be able to manage the COVID risk going forward?
- I think in a near term, yes, they probably will keep the zero-COVID policy. The reason is that it's never a good idea to loosen the policy in the face of case explosion. If you do that, you risk losing complete control on the COVID situation and causing huge pressure on health care system.
But we are seeing some signs that Chinese government is preparing for a transition out of zero-COVID policy. For example, they have made rapid antigen testing kit widely available, including online channels so essentially that can be ready for home use. They have also approved Pfizer's COVID antiviral pill. And on top of that, they also lowered the standard for discharge from hospital. So many more measures that are showing that they want to make the transition. And I think after this episode of breakout they will feel the sense of urgency probably will quicken their pace for a transition out of zero-COVID policy.
- And of course another risk for the Chinese market is the real estate sector. How will the tail risk in the real estate sector play out in your mind?
- Our base case scenario is eventually we'll see successful resolution of those real estate developers' funding crisis. But the problem is the government and the central bank need to be a lot more proactive and extending more support to create much better financial conditions for those companies to find solutions. And so far, we haven't seen that up until the recent Financial Stability Committee meeting.
- What about the technology regulations? Will there be more good news in the near future?
- Yeah. Up until the Financial Stability Committee meeting that I just mentioned, the tech regulation is not showing any signs of abating. To give you a few examples, for example, it was reported that Alibaba has pretty much wrapped up the self inspection phase, but they might face additional external regulatory scrutiny.
And Tencent is rumored to face a breakup of its payment unit. And another big firm, Meituan, is guided to lower its merchant fees amid slow economic environment. All of these news hit on the investor sentiment.
We fully appreciate why Chinese government want to regulate some of these big-tech firms because some of the past business practices indeed involved abuse of power. But at this point it's probably a little bit overdone. And as the former Chinese premier said it very well, confidence is more precious than gold. So at this point it's all about preserving investor and companies' confidence.
- Now, you mentioned the financial stability meeting. How important is it and what's the messaging that's coming from the meeting?
- It is a great turning point. The meeting was chaired by the Vice Premier Liu He and he's basically the top economic advisor for presidency. And from that meeting it addressed a lot of the market concerns on various issues that I just mentioned. For example, it mentioned that the central bank need to be more proactive in using its monetary policy. So in the near future we should expect the central bank to further cut rates and to support economy and also to maintain a stable credit growth.
In that meeting, it also mentioned that, on the tech regulation, not only the regulator should have red light for those companies, but they should also have green light and also aim to enhance the international competitiveness for those companies. So that is a great news. And it also mentioned some positive progress between China and the US security regulators. It seems like they will reach agreement soon and we will see the detailed plan probably in April or in May.
- And I also want to finally get your thoughts on what's going to be the spillover effect to other emerging or developed economies from some of China's policies?
- We think of spillover in terms of growth and inflation. In terms of growth, so far the spillover impact isn't very clear because many of the other economies is still going through the reopening stage. But if the Chinese economy further slowed down, it definitely will make an impact on the global economy.
And on inflation, the zero-COVID policy is causing a lot of economic disruption. So it's very likely that it will create new bottlenecks and add on to the already high inflation we are seeing now. But after the Financial Stability Committee meeting we are more hopeful that China can make a successful transition and increase their economic momentum in the near future.
- Haining, thank you very much for your insights.
- You're welcome. Thanks for having me.
[MUSIC PLAYING]
- Chinese stocks have been facing increasing volatility thanks to concerns about economic and regulatory uncertainty. With more on this, we're joined by Haining Zha. He's a vice president and director at TD Asset Management. Haining, what's causing the recent volatility in Chinese equities?
- I would say it's not just one factor but rather a confluence of different factors that is driving the storm we are seeing now. First of all, to start with I think the overall macroeconomic background is pretty weak. For example, in December 2021 the retail sales, usually a very stable economic data point, grow only 1.7% year over year. That is pretty weak.
And on top of that, you also have real estate sector tail risk lurking in the background. For example, the real estate developer Evergrande still hasn't come up with a very successful restructuring plan. And furthermore, you also have two large shocks to the economy. Number one is COVID. As we know, China and the rest of the world has a pretty large COVID gap and this year the COVID case on the rise and spread to multiple cities, particularly for some of the big cities or economic hubs like Shanghai and Shenzhen.
And recently the outbreak of Russia-Ukraine war also get people concerned. Although China is not directly involved, the perception of growing risk of sanction is increasing among investors. So that's another tail risk.
And moreover, you will also have two regulation-related risk. One of them is US and the Chinese regulators still struggle to come to agreement with regard to some of the accounting regulations. And the noncompliance of Holding Foreign Companies Accountable Act is making some of the investors losing confidence in the Chinese ADRs.
And furthermore, you also, domestically, the tech regulation is not showing any signs of abating. So as you can see this is a long list of worries. Although the Chinese government is trying to be more proactive on a monetary policy side, but so far the easing is not big enough and fast enough. That's why we are seeing the volatility right now.
- Now, it seems that a lot of the macro weakness that we're seeing in China is driven by COVID-related economic disruptions. Will China continue to stick to this sort of zero-COVID policy? And will they be able to manage the COVID risk going forward?
- I think in a near term, yes, they probably will keep the zero-COVID policy. The reason is that it's never a good idea to loosen the policy in the face of case explosion. If you do that, you risk losing complete control on the COVID situation and causing huge pressure on health care system.
But we are seeing some signs that Chinese government is preparing for a transition out of zero-COVID policy. For example, they have made rapid antigen testing kit widely available, including online channels so essentially that can be ready for home use. They have also approved Pfizer's COVID antiviral pill. And on top of that, they also lowered the standard for discharge from hospital. So many more measures that are showing that they want to make the transition. And I think after this episode of breakout they will feel the sense of urgency probably will quicken their pace for a transition out of zero-COVID policy.
- And of course another risk for the Chinese market is the real estate sector. How will the tail risk in the real estate sector play out in your mind?
- Our base case scenario is eventually we'll see successful resolution of those real estate developers' funding crisis. But the problem is the government and the central bank need to be a lot more proactive and extending more support to create much better financial conditions for those companies to find solutions. And so far, we haven't seen that up until the recent Financial Stability Committee meeting.
- What about the technology regulations? Will there be more good news in the near future?
- Yeah. Up until the Financial Stability Committee meeting that I just mentioned, the tech regulation is not showing any signs of abating. To give you a few examples, for example, it was reported that Alibaba has pretty much wrapped up the self inspection phase, but they might face additional external regulatory scrutiny.
And Tencent is rumored to face a breakup of its payment unit. And another big firm, Meituan, is guided to lower its merchant fees amid slow economic environment. All of these news hit on the investor sentiment.
We fully appreciate why Chinese government want to regulate some of these big-tech firms because some of the past business practices indeed involved abuse of power. But at this point it's probably a little bit overdone. And as the former Chinese premier said it very well, confidence is more precious than gold. So at this point it's all about preserving investor and companies' confidence.
- Now, you mentioned the financial stability meeting. How important is it and what's the messaging that's coming from the meeting?
- It is a great turning point. The meeting was chaired by the Vice Premier Liu He and he's basically the top economic advisor for presidency. And from that meeting it addressed a lot of the market concerns on various issues that I just mentioned. For example, it mentioned that the central bank need to be more proactive in using its monetary policy. So in the near future we should expect the central bank to further cut rates and to support economy and also to maintain a stable credit growth.
In that meeting, it also mentioned that, on the tech regulation, not only the regulator should have red light for those companies, but they should also have green light and also aim to enhance the international competitiveness for those companies. So that is a great news. And it also mentioned some positive progress between China and the US security regulators. It seems like they will reach agreement soon and we will see the detailed plan probably in April or in May.
- And I also want to finally get your thoughts on what's going to be the spillover effect to other emerging or developed economies from some of China's policies?
- We think of spillover in terms of growth and inflation. In terms of growth, so far the spillover impact isn't very clear because many of the other economies is still going through the reopening stage. But if the Chinese economy further slowed down, it definitely will make an impact on the global economy.
And on inflation, the zero-COVID policy is causing a lot of economic disruption. So it's very likely that it will create new bottlenecks and add on to the already high inflation we are seeing now. But after the Financial Stability Committee meeting we are more hopeful that China can make a successful transition and increase their economic momentum in the near future.
- Haining, thank you very much for your insights.
- You're welcome. Thanks for having me.
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