Is the Chinese stock market cheap?
Since 2021, investing in the Chinese stock market has faced challenges. CSI 300 has decreased nearly 30% since the highest point in February 2021. From the valuation perspective, the Chinese stock market has an advantage compared with the US market and the world’s major markets.
The average PE ratio of CSI 300 is about 15 (from CEIC) while the S&P 500 is about 25 (from Nasdaq Data). However, such a relatively low valuation doesn’t necessarily mean the Chinese stock price is cheap—its potential is more important than its current price.
At the beginning of 2022, under the influence of the pandemic and increasing uncertainties of the international environment, the price of energy and commodities keep rising. This challenges the supply chain management of Chinese companies and may increase their cost.
Furthermore, major cities in China, including Shanghai and Shenzhen, are under lockdown after the spread of the Omicron variant. How the Chinese government will prevent further spread and when the pandemic will end are important questions to China. In the short term, companies’ stock prices will be influenced by these negative effects. On the bright side, China has profound experience in dealing with the COVID, and due to its large economic size, the influence of the high raw material price will have a smaller effect than on/that of other developing countries.
According to the US Chamber of Commerce, the labor shortage in durable goods manufacturing in the US won't get better in 2022; as a result, Chinese exports will increase. In the long term, the growth of Chinese companies won’t be significantly influenced.
Due to the special political environment of China, government policies strongly influence the market and companies’ operation. In 2021, the Chinese government published its plan to continue stock issuance registration system reform. This new system will change from focusing on companies’ past performance to their future potentials. This also means that the CSRC will no longer have the right to judge companies’ values; instead, the market will decide their values and stock prices. The Chinese stock market will convert to a mature market in future years. In the past, giant state-owned companies showed little investment opportunities since their development capacities were relatively low. However, the new registration system gives the ability to invest in small but promising companies.
In the “14th five-year plan”, the Chinese government decided to put more effort on cutting-edge technologies and medicine. With companies like Huawei and Tencent, China shows its innovative capability, and . companies like CATL have become top of the world supply chain. Predictably, more companies like these will appear in China. Another important market is medicine and medical instruments. China’s large population and aging society means a broad market potential.
More medical/medicine companies are gaining their breakthrough in cancer treatment and other areas. One of them has obtained the breakthrough therapy designation from the FDA in 2022. Although the profit of generic drugs is reduced because of centralized procurement, the Chinese government also implements regulations to promote original ground medicines, including a special registration process. In the future years, these companies, such as Zai Lab will experience significant growth.
Since last year, Chinese giant technology companies and property companies have been influenced by anti-monopoly and de-leveraging policies.
In the short term, companies like Alibaba will lose profit, and some property companies may even regroup. In the long term, however, lower household leverage ratio is beneficial to consumption. Competition and a healthy debt rate are essential to economic growth. With further reform of China’s system, its stock market will become more transparent and professional. Together with innovation, there is still a broad expansion capacity in China, and this will be reflected on its stock market. In the long run, the Chinese stock market is still cheap compared to future gains.
Written by Tianrui Gu & Edited by Jacqueline Kim & Jimei Shen