China’s Stock Market Is Having a Tough Year. Why Big Investors Are Still Bullish.

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An electronic board shows the Hang Seng Index in Hong Kong on Sept. 20, 2021.

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Despite Chinese and Hong Kong stocks flirting with annual lows, investor sentiment among institutional traders remains broadly bullish, according to a new survey.

More than 80% of professional investors in China believe prices and yields on Chinese shares for the coming 12 months will rise, up significantly since May, when fewer than half said so, according to a new study by China’s elite Cheung Kong Graduate School of Business (CKGSB).

The study surveyed 1,900 individual investors and 600 institutional investors.

Meanwhile, sentiment among retail investors has veered the other way, becoming more pessimistic toward both mainland and Hong Kong market prospects.

“Institutional investors continue to raise their earnings expectations for China A-shares, Hong Kong stocks, and property prices,” the report said.

In fact, the divergence between retail and professional investors—which has continued to widen throughout the year—was the most surprising finding from the survey, according to Liu Jing, a professor and associate dean at CKGSB who led the team that conducted the study.

The disparity could be explained partly by traditional factors, but also by circumstances unique to China’s current political and economic climate, he said.

“Retail investors and institutional investors are focusing on different things. While the former respond by ‘feeling’ the market, the latter focuses on long-term, structural issues. In the last couple of years, they have mostly moved in the same direction. However, recent events in Chinese capital markets may have different interpretations for the short-term vis-à-vis the long-term,” he told Barron’s.

China stocks have had a tough run since their February high, as Beijing continued its regulatory assault on multiple business sectors, and a brief Covid-19 wave put the country back on edge.

While retail investors comprise the vast majority of trading on mainland exchanges by volume, institutional investors command nearly 80% of trades by market capitalization, according to investment bank CICC.

One retail investor in Beijing, who day trades in between running a hair salon, told Barron’s he felt certain Beijing’s regulatory crackdown was far from over. “Who knows when it will end,” the man, surnamed Wu, said.

Beijing’s widespread crackdowns have hit the ride-hail, food delivery, education, and gaming sectors, among others—with stocks in those areas taking historic beatings and denting the share prices of companies like Tencent Holdings (700: Hong Kong), Meituan (3690: Hong Kong), NetEase (NTES), as well as U.S.-listed firms such as Didi Global (DIDI), Alibaba Group Holding (BABA), and Baidu (BIDU).

“I still see investor sentiment towards China as deeply split between those who are running away, and those like me who are looking for the babies getting thrown out with the bath water,” Tariq Dennison, a wealth manager at GFM Asset Management in Hong Kong, told Barron’s.

Unlike more advanced markets, volatile Chinese markets tend to experience lengthy bear runs nearly every year, though annualized returns remain up. Over the past two decades, for instance, the MSCI China Index has produced an annualized total return of 12.3%, easily beating the 9.3% produced by the S&P 500, according to a Financial Times analysis.

“The 10-year question serious investors need to ask is whether they’ll be able to pull $200-$300 out of a $100 investment into a Chinese company made today, at these prices, and China bulls like me think the answer is more likely yes than no,” Dennison said.

A closer look at various Chinese indexes reveals nuances. The large-cap CSI 300 Index, as well as Chinese shares listed in the U.S., are down this year—the latter mostly due to regulatory and delisting concerns. But the benchmark Shanghai Composite Index is actually up slightly. The Hong Kong market’s bad year has been compounded by the impending collapse of property giant China Evergrande Group (3333: Hong Kong).

Sentiment for the financial hub’s prospects were similarly upbeat from professional investors and downbeat from retail traders—though the gulf was even wider than for the mainland.

“Chinese mainland markets reflect domestic sentiment in China, especially among retail investors, whereas the Hong Kong market reflects sentiment by big global institutional investors, so it’s not that unusual to see this kind of divergence,” said Doug Young, editor-in-chief of Shanghai-based Bamboo Works, which provides analysis on Chinese companies listed in Hong Kong and the U.S.

“In this case international investors are clearly more worried about ongoing regulatory crackdowns in China, which have also dealt a major blow to Chinese shares traded in the U.S.,” he told Barron’s.

Bruce Pang, head of research at China Renaissance Securities, agreed, saying “investor sentiment, especially among institutional investors, is comparatively positive on A-shares versus [Hong Kong] H-shares, given that the onshore markets are more sensitive to policy spurs, and the PBOC is now shifting gears to a slightly more supportive stance and continuous fund inflows from overseas investors.”

“Besides, compared with the Hong Kong market, the domestic A-share market has a much higher proportion of quality growth stocks in the following four categories, all of which have been highlighted by China’s policymakers”—advanced technologies, manufacturing, livelihood-related sectors like healthcare, and green-friendly sectors, he said.