Chinese shares have underperformed for all of this year, in fact since last November, even as they reached a record high. Regulators have dented faith in Chinese tech companies by challenging them over monopolistic practices. The authorities are dolling out fines company by company in what was China's hottest sector.
Policymakers have also resumed their wringing to squeezing excessive leverage out of the Chinese system. But most of all, China is suffering a crisis of consumer confidence. What would make that turn?
It is the companies making consumer staples and also discretionary-spend items that are the two worst-performing sectors since setting a record February high. Defensive sectors such as energy, utilities and banks have performed the best since then. Tech, unusually, is flat.
The CSI 300, which represents the 300-largest companies listed in Shanghai and Shenzhen, has tested lows below the 5,000 level four times since early March. After stumbling around, the index finally appears to have re-found its legs, gaining 6.6% since May 13.
That makes it time to reposition into Chinese equities, according to Société Générale. The French bank notes that Chinese equities are trading at a 5% discount to their cyclically adjusted P/E ratio of 19.4. The U.S. market is trading at a premium of some 55%.
Chinese shares were the first post-pandemic stars. The Chinese market rose 59.0% between its COVID low on March 20, 2020, and an all-time high of 5,807.72 for the CSI 300 this February 10.
That made Chinese shares one of Asia's top-performing markets last year. But they have since surrendered that ground. Indian shares are currently Asia's top stars, bizarrely to my mind. The benchmark Sensex index in Mumbai is up 66.4% over the course of the last year, and has been little-affected by the world's worst outbreak of COVID-19 that has plagued India for the last two months. Yet again, the market appears completely out of synch with what's going on in the real world.
Only South Korean stocks, which were Asia's top performers in 2020, come anywhere close to rivalling the performance of Indian shares. The shortage of semiconductor chips worldwide has been a boon to Korea's foundries and electronics companies. The Seoul benchmark, the Kospi, has advanced 56.1% over the course of the last 12 months. But that's still a full 10 percentage points behind the performance in Mumbai.
Also in the real world, China's recovery from COVID continues, but with shaky consumer confidence. The vaccination rate remains low as China continues to play "pandemic politics." Chinese vaccine producers are exporting close to half the doses they make, to deliver on Beijing's promises of pandemic aid made to other governments.
Chinese citizens have reverted to pre-pre-pandemic trends. The country had been gradually shedding its reputation as a nation of excessive savers, gradually converting from generations of farmers conditioned to put money away for a rainy day to more of a modern earn-and-spend economy. The service sector accounted for an increasingly large chunk of the economy.
The pattern has broken post-pandemic. Chinese families are saving some 40% of their disposable income, apparently taking a wait-and-see approach even though industrial output is back at pre-COVID levels. "This is not what a recovery is supposed to look like," Standard & Poor's Asia-focused economists Shaun Roache and Vishrut Rana write in a report today. "Urban households are mostly saving more. Rural households, typically with less income, are also saving more."
Rural consumers and migrant workers have a smaller buffer. That will take time to build back if job losses temporarily dented their income, even if the jobs are now back on offer. Urban savings are now approaching 40% of income, while rural families are putting away close to 20% of their take-home pay.
Asia's early success in containing the coronavirus has also set back its vaccination efforts. There's little urgency about getting vaccinated here in Hong Kong or on the mainland. Although local outbreaks do occur, they are small-scale and normally quickly contained. That means the virus has yet to hit home to most residents of greater China.
In Southeast Asia, it is a lack of access to vaccines that is holding back the economies. Those developing nations can't put COVID behind them because they don't have the medicines they need. In East Asia and greater China, though, it is a criminal level of complacency, not any lack of access to vaccines, that is holding efforts back.
Hong Kong may even throw away millions of doses, having booked 7.5 million vials of both the Pfizer (PFE) -BioNTech (BNTX) drug and the Chinese-made Sinovac vaccine, to cover a population of 7.5 million. The vaccines are free here in Hong Kong. But only 29 doses have been administered per 100 residents, and you can walk in to get your free shot any day of the week. The vaccination rate is only slightly higher in mainland China, at 38 doses per 100 people, with all the vaccines on offer here in Asia requiring two doses for full effectiveness.
It will take a clear exit strategy from COVID for Chinese consumers to regain their confidence, Roache and Rana at S&P believe. The current pattern of COVID control followed by small outbreaks and headline-grabbing hard lockdowns on a local level do not instill faith that the disease is behind us. There's no hard number for "herd immunity," but something like 60% to 80% of the community would likely need to be vaccinated to forge a path to the economic exit strategy. At current speed, it will already take mid-2022 to reach that kind of level in China, and that's without adjusting for any new variants that might complicate matters.
Absent clear signs of social recovery from COVID-19, it is highly likely that Chinese savers will pump their money into property. It's a tried and tested strategy, and for good reason. In the decade through 2020, real estate produced an annualized return of 7%. That compares with 6% for Chinese equities, which suffer through intense periods of volatility. Twice in recent years, equities have lost more than 25% in a year, in both 2011 and 2018. That's not where you want to put your money to work if you're saving. Only in 2014 did property decline, and even then by only 2%. Bank accounts yield only 2.2%, narrowly above the 1.5% inflation rate.
Chinese stocks are notoriously momentum-driven. Shanghai and Shenzhen are dominated by retail investors who love to "stir fry" stocks for speculation, buying and selling quickly without regard for fundamentals. The wok for now remains in the kitchen cupboard. It will take greater confidence for investors to pull it back out and set it on the open flame. There's an inkling that may be starting to happen, but Chinese real estate is a more certain bet than mainland shares for now.