Reuters
Reuters
HONG KONG (Reuters Breakingviews) – Tuesday’s rally in China shares may have been based on rumour. But in offshore markets, the value discount on offer is so extreme it makes gambling on false hopes less risky than it might otherwise be.
The Hang Seng Index closed up 5% on Tuesday after a post on Chinese social media purported to show Wang Huning, a key member of China’s cabinet-like Standing Committee and the country’s chief ideologist, had formed a “Reopening Committee” that would explore relaxing harsh lockdowns implemented under President Xi Jinping’s so-called dynamic zero-Covid policy. This has naturally suppressed economic activity, in particular in the services sector and real estate, so such a change would instantly revive growth and boost earnings at listed Chinese companies, most of which are focused on domestic markets. Mainland bourses in Shanghai and Shenzhen posted lesser rallies; New York-listed Alibaba closed up 7%.
Buying based on online scuttlebutt might seem reckless, but less so considering how beaten up offshore shares in some Chinese companies are. Alibaba, at $67 per share on the New York Stock Exchange, is trading slightly below its 2014 initial public offering price. The average constituent of the S&P 500 trades at 15 times its estimated forward earnings, while the Hang Seng China Enterprises Index ratio is 5 times, Datastream shows. Down 34% year-to-date, the Hang Seng is the second-worst performing major global index after Russia. Shares in dual-listed firms are selling in Hong Kong for half their onshore price, but this discount is a chimera as the shares are not mutually fungible, making arbitrage impossible. Even so, it highlights how skeptical foreign capital is of the China story these days. Returns are demonstrably higher elsewhere, and outflows are surging. The question, though, is at what point investors see value in beleaguered Chinese technology companies and real estate developers.
One issue is that investors are terrified of President Xi Jinping. Because the population of Chinese companies that listed in offshore markets is overweight on internet companies, fintech and, in Hong Kong, property, they have suffered more under Xi’s various policy crackdowns than the staid state enterprises trading in Shanghai. However, it does seem like the pressure is easing. If Beijing were to wrap its head around the idea that keeping Covid-19 out of the country forever is impossible, there is a huge potential upside given how steep the selloff has been.
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CONTEXT NEWS
Hong Kong and China stocks jumped sharply on Nov. 1 after rumours circulated that China was planning a relaxation of strict Covid-19 curbs in March 2023.
An unverified note trending on social media, and tweeted by influential economist Hao Hong, said a “Reopening Committee” has been formed by Politburo Standing Member Wang Huning. A Chinese foreign ministry spokesman later said he was unaware of the situation.
(Editing by Antony Currie and Thomas Shum)
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