Interactive Investor

China’s stock market crash: biggest fund, trust and ETF losers

25th October 2022 10:19

Sam Benstead from interactive investor

Chinese leader Xi Jinping is spooking investors with his latest power grab, writes Sam Benstead.

Once a stock market darling, Chinese shares are trading at a 13-year low as a result of the growing concentration of power in the hands of Chinese Communist Party (CCP) leader Xi Jinping and his increasingly heavy-handed interventions in markets and the economy.

The Hang Seng index (HSI), which tracks the largest companies listed in Hong Kong and currently has 73 constituents, is worth about the same as during the bottom of the market during the 2008 financial crisis. It includes internet firms such as Tencent, Alibaba and Meituan.

Today, the index is worth 15,180 points, similar to January 2009. It bottomed out at about 12,000 points in March 2009.

Its 35% crash this year means that investors have lost nearly half their capital value over the past five years.

The Shanghai Stock Exchange Composite index, which owns more domestic Chinese companies, has fallen 18% this year, while the Nasdaq Golden Dragon index, which owns Chinese firms listed in the US, has fallen 40% this year.

The reason for the renewed selling is that President Xi has further established control of the Communist Party after he had his predecessor Hu Jintao publicly escorted from the Communist Party Congress last weekend.

This has spooked investors, who are worried that strict zero-Covid policies endorsed by Xi will continue at the cost of economic growth, and intervention in publicly listed companies, such as technology giants Alibaba and Tencent, as well as the education and gaming sector, will carry on at the cost of shareholder returns.

For example, the CCP blocked the initial public offering of financial technology firm Ant Financial in 2019, which would have boosted its major shareholder Alibaba. In addition, it ruled that the private education and tutoring sector could be conducted only on a “non-profit” basis. It also fined the internet platforms for supposedly breaching anti-monopoly laws.

There are also signs that the Chinese economy is slowing following more than two decades of rapid growth and the emergence of a middle class, manufacturing and technology sectors.

GDP figures for the third quarter of the year showed growth of 3.9% compared with last year, well below China’s target of 5.5%.

The negative backdrop has crushed funds, trusts and exchange-traded funds (ETFs) with exposure to China. The average performance of an investment trust in the space this year is a 40% share price loss. This includes a 45% drop for JPMorgan China Growth & Income, a 42% drop for Baillie Gifford China Growth Trust, a 38% drop for Fidelity China Special Situations, and a 36% fall for abrdn China Investment Company.

ETFs, which do not to the same extent swing to discounts to net asset value like trusts - which can make short-term losses more extreme - are also struggling. The typical China ETF is down 30% this year, including the HSBC MSCI China ETF and Franklin FTSE China UCITS ETF.

The biggest open-ended fund losers are Pictet China Equities (39% drop), Templeton China (38% drop), GS All China Equity Portfolio (35% drop) and JPM Greater China (35% drop).

Not all China funds have registered big losses. Fidelity China Focus is off just 7.5% year-to-date, while AB Sicav China A Share Equity is down 19%.

More top investors are shunning China due to the political risks, or only investing in firms that are aligned with the goals of the CCP.

On the one hand, Jason Pidcock, manager of the £950 million Jupiter Asian Income fund, having been underweight Chinese shares versus the 28% allocation in its benchmark, now holds no mainland Chinese stocks.

In July, he sold its last remaining Chinese stocks, as well as one Macau-based business. Pidcock said: “Prior to this, the fund had already been underweight China for some time, due to my low expectations of corporate profitability relative to the rest of the region and a belief that valuations in China deserved to be de-rated, given a long period of regulatory clampdowns and travel restrictions.

“More recently, I have become increasingly uncomfortable with the direction of domestic politics in China, as well as the souring of relations with other countries, in particular the US, and I continue to take a negative stance on the outlook for China’s economy.” 

Simon Edelsten, manager of the £460 million Mid Wynd International investment trust, takes a similar view. He sold out of all Chinese stocks last summer.

Speaking to interactive investor in a video interview earlier this year, Edelsten said: “At one stage we had nearly 10% of the trust's assets in China, so it was a significant proportion of our assets going back three or four years now, and we'd made very, very good money there.

“But we were wary that the Chinese government, having done a remarkable job for their people over 20 years bringing up the average per capita pay, now has a very different set of political priorities than creating manufacturing jobs.”

Not all global investors have turned their back on China. Scottish Mortgage (LSE:SMT), the giant trust from Edinburgh-based Baillie Gifford, has around 15% invested in China. That figure was as high as 23% in 2020, but its Chinese shares have fallen significantly in value since then.

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