Everybody hates China

To a certain extent, these points are valid, and China deserves a discount in valuation to compensate for the perceived risks. In fact, it is heavily marked down. 

The Hang Seng China Enterprise Index is trading at less than 8 times forward earnings (price-to-earnings ratio) and 1.1 times book value (price-to-book ratio), on par with the 2008 global crisis trough and a deep 35-per-cent discount to the MSCI Asia Pacific ex-Japan index.

The reform package recently unveiled at the Third Plenary Session of the Central Committee of China’s Communist Party could help alleviate bubble fears and policy concerns. 

According to Jun Ma, a China chief economist at Deutsche Bank, the mega-reform package, which includes 60 measures, is by far the most profound in a decade, if not decades, in terms of scope, depth and impact. 

Emphasising that the market would play a “decisive” role in allocating resources, this plan will guide China’s second-half journey towards a market-based economy, significantly lift China’s growth potential and help reduce macro risks. 

Fitch Ratings said in a statement that the “main factor weighing on China’s sovereign ratings is the unsustainability of its current investment-led and credit-fuelled growth model”. 

“The post-session communique provides two important signals which suggest that the authorities are approaching this issue – the emphasis on the market for allocating resources and the establishment of a central leadership team on reform. If implemented effectively, these measures could optimise fiscal transparency and overall budget management.” 

Moody’s, another international credit rating company, also said reforms are credit positive for the sovereign government, local governments, state-owned enterprises, property developers and utilities.

While everybody has spent the last four years focusing on the risks that have yet to materialise, the upside in China might have been hugely overlooked. 

China’s GDP has been growing comfortably above 7 per cent annually, a level at which analysts believe constitutes a hard-landing scenario where economic growth is too slow to absorb the incoming workforce. 

Since 2009, the profit of Chinese listed companies has been growing by roughly 70 per cent, in line with the profit growth of the SET index, according to Bloomberg data. 

Chinese stocks have been selling at a bargain because everybody has been focusing solely on the risks. With the reform plans shifting investors’ focus from risks to long-term growth potential, Chinese stocks could be a very good investment opportunity.

 

The author, Komsorn Prakobphol is a senior investment strategist at Tisco’s economic strategy unit. He can be reached via www.tiscowealth.com or [email protected].