From BELL.ИНВЕСТИЦИИ Александра Чунова 20 МАЯ 2022
Following the economy, Russian trading platforms are also turning to the East: the St. Petersburg Exchange is going to give Russian investors direct access to Chinese exchanges in the coming weeks. We talk about the current situation in the Chinese economy and what risks and features of the market should be taken into account by investors.
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What Chinese securities are available to Russian investors
The Moscow and St. Petersburg exchanges previously stated that they see the interest of their customers in China and want to expand the number of instruments available to them.
American depositary receipts of Chinese companies – Alibaba, Baidu, JD.com and others – are traded on the St. Petersburg exchange. Until February 25, they were also available on the Moscow Exchange, but now trading in foreign securities is suspended due to the blocking of operations by foreign depositories Euroclear and Clearstream.
Both exchanges announced plans to provide Russian investors with access to trading in shares of mainland China and Hong Kong a year ago. In January, Best Efforts Bank, the settlement depository of the SPB Exchange, received the status of Qualified Foreign Institutional Investor (QFII) in mainland China. Obtaining a license will allow investors with access to the St. Petersburg exchange to buy and sell shares of type “A”, quoted in yuan, the report said.
Recently, the SPB exchange announced that it is at the final stage of building infrastructure and in the coming weeks will launch trading in several dozen instruments. Mosbirzha did not respond to a request for comment.
From August 2021, access to the Hong Kong Stock Exchange is also provided by Finam. Clients of the broker, in particular, can trade shares of Lenovo, Xiaomi, Bank of China. The broker plans to provide them with direct access to about 10 new foreign sites by the end of 2022, Frank Media wrote this week. Among the possible countries are the markets of Brazil, India, Shanghai.
What is happening now with the Chinese economy and the stock market
The coronavirus continues to have a strong impact on the Chinese economy. According to the National Health Commission of China, 1,082 new cases of Covid infection were identified in the country on May 18. This is less than in Russia, which recorded 4927 new cases on the same day.
But China adheres to a zero-tolerance policy for the coronavirus and introduces partial or complete lockdowns in areas where outbreaks of the disease are recorded. In Shanghai, the country’s trade and financial center, which now accounts for most of the infections, about 790,000 residents are forbidden to leave their apartments.
Coronavirus restrictions have hit the country’s economy hard. Industrial production in April fell by 2.9% year-on-year, retail sales fell by 11.1%. Unemployment rose to 6.1%, the highest since February 2020. China’s difficulties have spread to other countries: more than 180 companies around the world reported in their financial reports for the first quarter about the negative consequences of the Chinese lockdown, Bloomberg calculated.
In this regard, economists began to reduce the forecast for the growth of the Chinese economy in 2022. Goldman Sachs changed the estimate from 4.5% to 4%, Citi economists lowered expectations from 5.1% to 4.2%. It is also below the Chinese authorities’ target of 5.5%.
Foreign investors are concerned about the economic situation in China, as well as geopolitical tensions. In April, they reduced their investments in Chinese bonds denominated in yuan by $ 16 billion, the Wall Street Journal writes, citing data from two clearing houses – China Central Depository & Clearing and Shanghai Clearing House. The outflow continues for the third month in a row.
For many years, the yields of Chinese government bonds significantly exceeded those of American ones. In 2020, the difference reached 2.5 percentage points. However, according to FactSet, on May 17, the yield on 10-year US Treasury bonds was 2.969%, which was 0.15 percentage points higher than that of Chinese ones.
China’s stock market has been disappointing investors for more than a year. In 2021, the MSCI China dollar index fell by 21.64%, mainly due to tightening regulation, and in January-April 2022 it fell by another 17.7%.
Overall, while China’s economy has grown at a double-digit pace in recent decades, the MSCI China Index grew at an average annual rate of 1.1% while the Developing Country Index grew by 6.9%. True, in the last five years, the difference in the average annual yield has decreased: 2.3% against 4.7%.
What risks and features should be taken into account by investors
1. China continues to be a developing country and is characterized by inherent risks, in particular unstable and unpredictable policies. For example, at the end of 2020, the Chinese authorities blocked the IPO of Ant Group, the fintech giant of Alibaba founder Jack Ma. The company also had to restructure. The Ant Group case has launched a giant campaign to tighten regulation of the Chinese technology sector.
China, as a developing country, the global acceleration of inflation could put more pressure. China is the world’s largest importer of oil and gas, so it will also be negatively affected by rising energy prices. In addition, in countries where spending on food and energy makes up the majority of household spending, rising prices are forcing consumers to abandon other goods, which slows economic growth, says William Jackson, chief economist for emerging markets at capital economics. In April, inflation was slightly higher than market expectations – 2.1%, but so far it is still low and does not cause any special concerns now.
2. Investors should not forget about the geopolitical risks from which the Russian market has suffered so much. The scale and speed of the sanctions against Russia make it necessary to rethink the West’s attitude towards China and the strength of trade ties as a guarantee of diplomatic security, Simon Edelsten told Bloomberg of the British investment firm Artemis Investment Management. According to him, the tightening of China’s rhetoric towards Hong Kong and claims to sovereignty in the South China Sea also cause concern for the company, which stopped investing in the country last year.
The losses faced by Western companies in Russia have already led to a large-scale recalculation of risks on the part of investors, warned Edward Allen of Foreign Policy. That contributed to a sharp outflow from Chinese stocks in March, when net sales under the Stock Connect program, which connects mainland chinese exchanges with Hong Kong, reached $ 7 billion – this is the largest outflow in almost two years.
3. The structure and rules of the stock market in China are different from those to which investors in Russian and American stocks are accustomed. Earlier, we talked about the complex system of dividing Chinese shares into several types, which depend on the availability to residents and non-residents, as well as the place of listing.
The transparency of the Chinese stock market also raises questions. In previous years, investor confidence in Chinese stocks has been repeatedly undermined by accounting fraud scandals. In 2019, Kangmei Pharmaceutical admitted to overstating its cash reserves by $ 4.4 billion, at the same time, another Chinese company, Kangde Xin Composite Material Group, defaulted on bonds worth 1 billion yuan ($ 148 million) just a few months after reporting the presence of 15 billion yuan in cash and equivalent.
The problem of transparency became relevant again at the end of last year in connection with the crisis in the real estate market in China. Some developers, including Evergrande, said they had enough liquidity to pay off debts, but then violated their obligations.
China is the only country that is marked in red on the map of the American Public Companies Accounting Supervisory Board (PCAOB), as it refuses to provide the necessary information to supervise the audit of public companies. In the U.S., there has been a dispute over the audit supervision of Chinese companies registered in New York for more than a decade. Now the situation has escalated, and dozens of Chinese companies are under the threat of delisting from American exchanges.
What’s the bottom line?
Over the past 30 years, the Chinese market as a whole, despite the growth of the economy, has brought extremely low returns to global investors. Time after time, Chinese authorities have inflated an asset bubble thanks to cheap credit, noted Jason Zweig of the Wall Street Journal. The rampant growth of the real estate sector in recent decades has now brought some major developers, including Evergrande, to the brink of default late last year. Low profitability is also a payment for the frequent presence of officials on the boards of directors of public companies, dirigisme and violation of the rights of minority shareholders, writes Zweig. All this should be borne in mind by investors looking for an alternative to the markets of developed countries.
Posted from SLPRO Z
闫鹏和律师（Harvey YAN），中银律所总所高级合伙人（北京），毕业于北京大学法学院，获得法学硕士学位，并先后在伦敦政治经济学院和帝国理工大学读完并购和经济课程。担任中国并购公会并购专家委员会委员，中国国际商会专家委员会委员，全国工商联法律维权律师团成员，曾被中国并购公会授予“最佳并购律师”荣誉称号，荣膺“2022品牌影响力·十大领军人物”。
闫鹏和律师不仅精通国内外投资并购法律政策和实务技能，而且拥有杰出的商业智慧和经济头脑，兼有深厚资源和全球视野，服务过众多知名客户和有影响力的大型项目，擅长处理综合性疑难交易和重大复杂案件，拥有十分良好的口碑和信誉，是深受欢迎的法商融合专家型律师。
