Bargain-basement Chinese stocks still aren’t cheap enough


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Chinese equities are now among the world’s cheapest. One of the worst performing markets last year, a slump of over 40 per cent in recent years has pushed valuations down to levels that are stirring hopes of a rebound in the new year. But it is still too early to call a bottom. 

The benchmark CSI300 index of Shanghai- and Shenzhen-listed stocks is off to a weak start this year, down 42 per cent from its 2021 peak. It trades just 10 times forward earnings, less than half that of global benchmarks including the US and Japan. At 1.2 times book value, it is pitched at only a third of the level of the S&P 500 index. 

Two of the most promising areas, electric cars and AI-related tech stocks, have been losing their lustre. The Chinese EV market is caught up in an escalating price war that is squeezing margins. Some of the largest names including Nio are lossmaking. Meanwhile, US export controls have reduced access to advanced chips, threatening to stunt development of AI technologies. 

Regulatory uncertainty adds to the risks of buying in. Beijing’s crackdown on tech groups, which investors had thought ended last July, may not be over. In late December, when officials proposed rules to curb spending on video games, Chinese gaming and internet stocks plunged. Reports this week that Beijing had removed a top official in charge of the curbs did little to reverse the losses.  

But by far the biggest risk remains the country’s property sector. The slump worsened last year, despite aggressive government measures to prop up sentiment. The slide in China’s home sales accelerated in December, with the value of new home sales among the biggest developers falling 35 per cent from a year earlier. China’s real estate sector accounts for 30 per cent of the country’s GDP. 

Regulators have taken drastic measures to boost investor sentiment, including slashing the stamp duty on stock trades by half in August, the first time in nearly two decades. They have restricted divestments by major shareholders, lowered the threshold for participating in margin trading and have called for the addition of more market makers to improve liquidity.

These measures, which during normal times would have been more than enough to provide a lasting boost, have so far done little to stem declines. 

Foreign investors have already started the year by selling a net $740mn worth of Chinese stocks. Bottom-fishing investors should wait until a significant stimulus package, somewhere near the scale of the one Beijing launched during the 2008 global financial crisis, is announced before venturing in.

Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore



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