Chinese Stocks Outperform Global Peers
Chinese stocks are outperforming global markets by the largest margin in eight years, signaling that government efforts to stimulate the market are starting to pay off, although many foreign investors remain hesitant to jump back in.
This year, the MSCI China index has climbed by 35%, while the MSCI World index has risen just 14%. It’s the most significant outperformance since 2017.
The current bull market follows a year when many global fund managers labeled China, whose markets have been in a near-constant decline since early 2021, as “uninvestable,” primarily due to a government crackdown on the private sector and ongoing real estate challenges.
Still, the Chinese government is working to enhance corporate governance among both state-owned and private firms. They’ve rolled out substantial monetary and fiscal stimulus measures, including initiatives to support stock buybacks.
Many investors think these steps, along with increased stock purchases in the insurance sector and strategic buying by state-backed teams, are shifting the stock market into a more viable option compared to real estate. Brendan Ahern, chief investment officer at CraneShares, mentioned that people historically viewed the stock market as a risky gamble, akin to Macau. If the stock market becomes a more attractive income source, it could redirect funds away from real estate, which seems logical for the government, he noted.
Mark Headley from Matthews Asia pointed out that the government recognizes there’s a need for reforms to allow capital markets to compete with those in the United States. He observed that many Chinese citizens are understanding that owning multiple properties might not be the most sound savings strategy.
China’s stock market is relatively small compared to its economy. The World Bank estimates that while China contributed 16.8% of global GDP in 2024, its stock market only comprises 10.3% of global market cap. In fact, China is just 3.35% of the MSCI global index.
On a more optimistic note, Archie Hart, a portfolio manager at NinetyOne in London, noted that both the quantity and quality of Chinese stocks have significantly improved over the years. Out of over 5,000 companies listed in mainland China, around 2,500 boast a market cap exceeding $1 billion. He reflected on how choices were limited to state-owned enterprises three decades ago, whereas now there’s a wide array of e-commerce, technology, and consumer brands available.
Regulatory bodies are enhancing their focus on improving returns and corporate governance for state-owned enterprises. This includes aligning management performance with stock price metrics and return on equity. In response to last year’s worsening stock market crash, the government appointed Wu Qing, known as the “Broker Butcher,” to lead its securities regulator in an effort to stabilize the market.
Earlier this year, he remarked that foreign investors are vital to China’s capital markets and pledged to expedite the opening of capital markets. Last September, the China Securities Regulatory Commission encouraged listed firms to enhance investment value through legally compliant mergers and acquisitions, stock incentives, cash dividends, and share buybacks.
Despite these positive developments, some industry watchers believe there’s inertia within the government when it comes to implementing reforms that could lessen state control over corporate governance. Amar Gill from the Asian Corporate Governance Association noted a tension between government regulators and the party’s desire to control state-owned and even private firms while regulators aim to steer these companies toward shareholder value.
This year’s strong performance in Chinese stocks is occurring in a context where global investors are looking to diversify their portfolios, which are often heavily skewed toward the United States.
However, ongoing tensions between the U.S. and China, along with economic uncertainties, are keeping many investors from revisiting mainland stocks. In contrast, markets in Hong Kong and other Asian countries like South Korea and Japan are being viewed as less risky.
Headley added that re-attracting both domestic and international investors and stabilizing returns would likely take two to three years. Data from EPFR, which tracks capital flows into ETFs and mutual funds outside of China, shows that foreign investment in mainland stocks has been relatively low, with only $1.2 billion net flowing in this year.
Still, some foreign investors are skeptical that China’s reforms go far enough, reading recent government initiatives as a bid to tighten control over businesses and markets. Gill remarked that there remains substantial skepticism in the West regarding China.
Ryan Manuel from Bilby highlighted the ongoing friction between market reforms and the government’s commitment to controlling strategic sectors. He argued that “the power of industrial policy is stronger than the power of capital market reform.” Yet, despite these limitations, options for Chinese investors are quite restricted. “Where else can they put their money in China, especially when the real estate market is struggling?” he mused.
