China markets are ‘much cheaper’, but beware the crackdown on overseas trading: Amundi CIO

[PARIS] The chief investment officer (CIO) of French asset manager Amundi remains optimistic on Chinese markets, but has warned that Beijing’s recent crackdown on capital flows out of the country is not a good signal, especially for foreign investors.

Chinese markets are still “much cheaper”, and the country’s Five-Year Plan has given investors reason to be optimistic about the medium term, said Vincent Mortier. 

Speaking to reporters at the annual Amundi World Investment Forum in the French capital on Friday (Jun 12), he added that China’s competitiveness in exports is still high, even as domestic consumption remains an issue.

But he also said: “So far, China savers have essentially put their money in bank accounts, short-term bonds – not really yet into equities, that’s the missing part. No real interest by foreigners yet, and not a big allocation by domestic equity.”

He maintained that China, as a tool in portfolios, remains a good way to diversify.

“I think it’s better to be exposed for fundamental reasons, and it’s a good way to diversify, because the correlation of China over the rest (of markets) has been low, which is good. In fact, so we continue to continue to like China.”

Even as the world is besieged by major geopolitical issues such as the Iran conflict, which has battered certain markets, he is bullish on the chip sector in China, and predicted that the Asian giant will produce “competitive” chips in a few years.

Currently, South Korea, Taiwanese and US companies are ahead in this field.

Doubling down on overseas trading

Mortier warned that the recent crackdown on illicit cross-border stock trading under a push to stem capital outflows could ultimately be a negative for its own markets, in the light of growing demand for access to overseas stocks by mainland investors.

“I can understand the rationale behind it, but I don’t believe it was a very good signal, and it’s also one of the reasons why foreigners are not that keen to buy (domestically listed Chinese equities) onshore,” he said.

But Mortier pointed out that this development could, on a relative basis, be good for Hong Kong.

“I think, for many investors so far, Hong Kong is still a part (of their portfolios), and I think the Chinese authorities have understood that Hong Kong is useful in the toolbox,” the CIO said.

“So I think it will continue like this:  Hong Kong remains a proxy for China.”

US-listed Chinese stocks fell after the news of the crackdown broke. However, the stocks of many Chinese giants are also traded in Hong Kong and still accessible through approved initiatives such as Stock Connect. Chinese companies may thus be driven to list in Hong Kong.

Investors may yet lose confidence about this development, blighting the sentiment in China markets: Foreign investors are not convinced they should put money into future China, and domestic investors are not putting their money to work outside China.

“So we need to watch this, because if it is a start of a new protocol… it can be a negative for the Chinese market,” said Mortier.