Out-of-favour Chinese stocks get sudden boost from buyers
• The nationalistic fervour boosting some select sectors and shares has been lucrative for local investors
The trademark Chinese patriotism is back at play in markets. As Japan and the US place fresh curbs on Chinese technology firms, local investors are scooping up shares of those firms and state companies, and reaping handsome rewards.
China has for years been guiding money into its innovative companies, but investors sensed an urgency for technology independence last week after the US threatened to sanction chip maker Changxin Memory Technologies (CXMT), and Japan published rules to restrict semiconductor exports to China.
“We must choose to stand with our country ... and make long-term asset allocation in line with the country’s needs,” Liu Tuoqi, head of investment at Shanghai Zhangying Investment Management, told investors in a roadshow, describing the SinoUS conflict as “irreconcilable”.
But there’s a silver lining in the tech spat, he added. “It forces us to make chips ourselves ... the higher the wind and waves, the pricier the fish.”
Indeed, share prices of leading Chinese makers of semiconductor equipment have jumped since end-March, when Japan said it would restrict exports of 23 types of chipmaking equipment. Stocks such as Naura Technology, up 14%, Piotech up 45%, and ACM Research Shanghai up 19%, have led the way.
Japan last week finalised export control rules, effective on July 23, joining the US in a push to curb China’s ability to make advanced chips. US politicians’ calls to sanction CXMT following Beijing’s ban on US chipmaker Micron Technology also boosted shares in Chinese memory chipmakers such as ZBIT Semiconductor, up 26% last week, and Montage Technology 4%.
The nationalistic fervour boosting these select sectors and shares has also been lucrative for investors in an environment of sluggish and uneven domestic growth after China’s economic reopening in January. China’s benchmark stock indices rallied in anticipation of a bumper postpandemic recovery but have erased all gains since.
Brokerage Citic Securities said that US and Japanese curbs against China’s chipmaking industry will only accelerate Chinese efforts to replace foreign technology and invite stronger government support.
Reflecting the flag-waving fervour, at least eight asset managers have applied to China’s securities regulator to launch the first batch of investment products tracking the CSI Computing Infrastructure index, seen as the most vulnerable to foreign sanctions, and a vital area in the tech war.
FUND LAUNCHES
New fund launches will potentially channel money into China’s technology and chipmaking leaders, including ZTE, Unisplendour, Montage and Cambricon Technologies.
It comes as investors are also being subtly nudged — via favourable brokerage reports and mutual fund launches — to invest in state-owned enterprises (SOEs), which Beijing hopes can play a key role in the Sino-US tech war.
“If we want to realize technology replacement in the future, SOEs are the best platform,” said Yang Zhenjian, fund manager at Bosera Asset Management.
Cutting-edge innovation requires huge and long-term investment, which is beyond the ability of private companies, “but SOEs can do it,” Yang said.
To facilitate SOE fundraising, Chinese regulators have since late last year called for a revaluation of the state sector, boosting shares in US-blacklisted companies such as China Mobile, China Telecom and China Unicom. An index tracking innovative central SOEs has jumped 14% in 2023.
Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management, said he is bullish on Chinese chip equipment companies, state-owned telecom giants, and indigenous software makers that challenge US rivals in China.
For example, Kingsoft Office, a Microsoft rival that is being adopted widely by Chinese governments and SOEs, has surged nearly 50% in 2023.
Liu of Zhangying Investment admitted there is some froth in certain sectors supported by Beijing. For example, China’s chipmaking sector is now trading at 60 times earnings, compared with 16 for the broad market.
But he said: “China needs high valuation in some sectors ... Why don’t you put down your wager, while also supporting the country’s development?”