China reopening party over as emerging markets slip back to void

SINGAPORE – Emerging-market bulls betting that China’s reopening would drive a year of asset outperformances are seeing their dreams turn into dust.

The benchmark gauge for developing-nation stocks has not only totted up losses of more than 7 per cent since a peak in January, but is also underperforming its rich-nation counterpart by the most in three years.

Chinese shares have contributed 70 per cent of those losses, helping to erase US$750 billion (S$1 trillion) in market value. And the sell-off is spreading to nations with the closest trade ties to China, such as South Korea and South Africa.

The losses have come despite the second-biggest economy expanding at a faster-than-forecast clip, led by surging exports and consumer demand. That underscores a plethora of idiosyncratic risks, not the least of which are China’s increasingly assertive stance on Taiwan, its ties with Russia and the regulation of the private sector.

Investors remain underexposed to China as they seek more consistent policy signals that can sustain the economic recovery. 

“Even though data is still supportive of China recovery, we of course are still a bit more sceptical and look through to see if that recovery is that real,” said Mr Wilfred Wee, a money manager at Ninety One Singapore. “It’s not just about a sweetener or a reserve requirement ratio cut, it’s about coaxing and engaging companies to excite the private sector.”

The MSCI Emerging Markets Index is heading for a 1.5 per cent decline in April, trimming its 2023 advance to 2 per cent. The MSCI World Index of developed-market equities is sitting on gains of four times as much. That has sent the ratio between emerging markets and rich nations down 5.6 per cent this year, the biggest retreat since at least 2020.

China’s economic fortunes weigh on almost two-thirds of the benchmark index’s performance as, in addition to its own 30 per cent direct weighting, it impacts the outlook of eight of the 10 other nations with the biggest presence on the gauge.

It is this influence that drove a 25 per cent rally in the MSCI measure between October 2022 and January 2023 when China

rolled back its crippling zero-Covid policy

and set the stage for an economic reopening.

Since then, China’s economic data has indeed shown improvement. First-quarter gross domestic product (GDP) rose by 4.5 per cent from a year before, beating estimates of 4 per cent, while retail sales in March witnessed the fastest acceleration since June 2021. But peering beneath the hood, investors question whether these strong growth figures will continue into the second half.

Data over the weekend suggested the recovery remains lopsided, with the production side of the economy lagging the rebound in consumption.

High hurdle

For one thing, the government is opening up new battle lines in its geopolitical quest. Escalating tensions with the United States on issues from Taiwan to TikTok and semiconductor chips threaten to make China a no-go for Western capitalists. 

US President Joe Biden is in the midst of corralling support from other nations in the US’ efforts to curb investment into China’s high-tech industries, and plans to take action around the time of the Group of Seven summit in May. 

Meanwhile, the private sector is getting confusing messages from Beijing. The end of a ban on Australian coal imports and easing up on tech giants helped to brighten sentiment, but other signals – such as the disappearance of the high-profile banker from China Renaissance and pressure from the nation’s Finance Ministry to shun the four largest global accounting firms – are unnerving business leaders.

“The hurdle is very high,” says Mr Vey-Sern Ling, managing director at Union Bancaire Privee. “China has numerous perceived risks, which puts it on a low priority for non-benchmarked investors. So unless the investment case is very clear or risk-reward is extremely attractive, it may be difficult to convince investors to put more cash to work in China.” 

Asset allocators are voting with their feet. Overseas funds sold a net US$660 million worth of onshore China stocks in April, the first net foreign monthly outflow this year. The MSCI China Index tumbled 5.3 per cent in April, erasing this year’s advance. The gauge is poised to end April with a 19 per cent valuation discount relative to the rest of emerging markets, a far cry from the 15 per cent premium it traded at a year ago.

Currencies are similarly feeling the spillovers from China’s uncertain growth outlook. Asian currencies have underperformed against the dollar so far this year, as the region’s export-driven economies are dependent on China’s outlook, while Latin America’s currencies gained against the greenback mainly due to the higher carry on offer.

History shows “it takes two quarters to convince investors that the recovery is real,” Mr Larry Hu, the head of China economics at Macquarie Group, wrote in April.

“Despite the stronger-than-expected first-quarter GDP number, the debate on recovery will continue in the second quarter.” BLOOMBERG