Tu Tongjin, the last survivor of China’s legendary Long March from 1934 to 1936, passed away in July last year at the auspicious age of 108. Tu, a neurosurgeon who became a founding major general of the People’s Liberation Army, later also served as the president of the Chinese Military Medical Academy.
Departing from their headquarters in the Southern province of Jiangxi, Mao Zedong led the 65,000-strong First Army to travel more than 9,000km across Western and Central China to Yan’an in Shaanxi to avoid being encircled by the Kuomintang.
Fewer than 7,000, or only one in 10, survived the march, out of which many prominent party leaders, including Yang Shangkun, Zhou Enlai and Deng Xiaoping, emerged.
For those invested in China since 2019, the journey has often felt as arduous and painful as the myths around the Long March surrounding Mao’s ascend to the head of the Chinese Communist Party.
Already battling Trumpian trade wars, the Hang Seng Tech Index (HS Tech) followed their American counterparts in the Nasdaq to rise about 2.5 times from 4,100 to just under 10,700 in February 2021.
However, three months earlier, the cancellation of the US$37 billion dual listing of Jack Ma’s Ant Financial Group in Shanghai and Hong Kong by Chinese regulators and his fall from grace, followed by an exodus of entrepreneurs from the country, triggered the death of Chinese tech stock prices by a thousand cuts.
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Alternate reality
Then the Covid-19 pandemic hit. As China went into a lockdown, a targeted takedown of the excesses of platform economy entrepreneurs and property barons like Country Garden and Evergrande in the name of common prosperity also took a toll on the market.
This correction happened in 2021 while the rest of the world was enjoying a Covid rally where everything from US meme stocks and spacs to cryptocurrencies surged to new highs that overshot reality.
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An inevitable slump in 2022 saw some tech stocks on the Nasdaq correct by up to 70%, and the index lost over half its value as a crypto winter set in, although this had a limited impact in China.
Except for a few short-lived rallies on the way down, the HS Tech declined to almost a quarter of its peak at 2,800 points at the end of October 2022. A 70% rebound to 4,800 by the Lunar New Year of 2023 following the belated and sudden relaxation of Chinese Covid measures offered a brief respite.
Despite US stock markets breaking new highs since 2023, fuelled by the Magnificent Seven stocks, Nvidia and an artificial intelligence (AI) story that is now starting to look stale, the HS Tech Index retreated to 3,200 on Valentine’s Day this year.
Much like how the Chinese government’s Covid policy turnaround shocked the country and the world at the end of 2022, the announcement just before Chinese Golden Week that the government would finally do “whatever it takes” in fiscal stimulus and monetary policy once again was the Big Bang at a time when the last international China bulls were not just ageing and unfashionable, but becoming as rare as unicorns.
China was “uninvestable”, proclaimed JP Morgan then, because of Western sanctions and US industrial policy. The country was also lost in the Communist ideology of common prosperity, allowing large developers to fail to snuff out property speculation.
By then, many local entrepreneurs and stock investors had the market. It has been three years of “too little too late” from policymakers who remained behind the curve after the self-inflicted Covid isolation saw the economy sputter with youth unemployment reaching levels that forced policymakers to hold back from publishing data.
Only when hope for remaining investors had all but run out and my Chinese ETF investments were consigned to the sidelines as “longterm” portfolio diversification, were the bulls finally let out. In two weeks since, 3,400 points became 5,228, an almost 60% rise in the HS Tech Index, with the sharpest rally taking place during the Golden Week holidays.
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Reports of the Chinese stock rally before the holiday break and its aftershock in Hong Kong inspired confidence, enabling property sales to surge during Golden Week.
After I sold much of my China ETFs while climbing Mt Fuji in Japan, the remaining units were also sold as my GTC (Good ’Til Cancelled) sell orders were triggered as the index rose every 5%– 10%. I could have made a killing by not doing anything, but my mantra remains that no one has lost money taking profit before leaving more on the table, as the rally showed no signs of stopping, although it will eventually.
All good horses have to rest
On Oct 5, the Singapore Turf Club ran its last race to honour its rich 182-year legacy. The 100th Grand Singapore Gold Cup, the jewel in the crown of local horse racing, was a fitting tribute to its storied history.
I also had the good fortune to be hosted by Diageo, which sponsored an excellent Scottish whisky donor experience for Equal Ark, a charity which promotes social-emotional development through animal-assisted services and empowers vulnerable persons such as special needs children and seniors to transform their lives.
Like in many interactions I had over the last week at various conferences, the chatter was about Chinese markets.
Should we doubt that this rally can go on unabated, with such determination shown by the central government?
My answer is we shouldn’t doubt but should temper our enthusiasm in the short-term. I have been a stale China bull for a while in this column, advocating selling US tech and urging brave investors to buy their Chinese counterparts instead, based on the hypothesis of the relative valuation of the Nasdaq versus the HS Tech Index and the S&P 500 versus the CSI 300 Index.
My first reason is short-term and technical. The HS Tech ETF in Singapore rose to its highest since March 2022 in a quick, sharp burst. Similarly, the broader-based Lion-OCBC Securities China Leaders ETF, which has risen 20%, is close to the levels seen when it was first launched a few years back. Technicians point to the all-time high of the short-term Relative Strength Index (RSI) and quarterly momentum during the week ending Oct 4.
A slight retreat at the end of the period portends a negative divergence with the stock price. It may take a pause and ease back 10% to 75 cents from 83 cents after an initial flourish post-Golden Week as domestic Chinese retail stocks play catch up. If the onshore markets do not follow through as rapidly, this rally will take a breather, but I have sold first and will ask questions later.
Bulls will point out that the HS Tech Index at 5,200 points is still less than half its early 2021 peak compared to US markets that have made new highs since the 2022 correction.
Based on relative values, my theory still holds that I should be invested in China tech rather than overpriced and overhyped US AI-related stocks, although that relative gap is narrower.
I have never joined the AI party in the US in significance apart from some global allocation funds, which indirectly will have some part of it, but if I had, I would have sold in the recent peaks well before the US election.
However, with a 50% rally, my second caution is that the relative value argument needs to be more compelling. We are starting to get to levels where stuck “long-term” Chinese investors are seeing daylight after the Long March for three years on their residual Chinese portfolios.
Local and international investors are indeed “underweight” on Chinese equities — just like how Japan became our dark horse for 2023, which has continued to gallop since. However, short-term hot money inflows do not make Western institutional allocation, which is still scarce.
Domestic institutions and retail investors will have to sustain the breakout rebound. They will even be supported by Chinese émigrés overseas who now see some positive carry on their books and may have the speculative capacity to punt the run-up.
Hot money is just that. It will come, and it will go. Therefore, while consolidation for the Hang Seng China Enterprises Index (HSCEI) and Hang Seng Index, based on technical analysis, is expected to be mild, with Hong Kong’s 30% rise this year coming just from the last two weeks, it has become the best-performing major market in the world — outperforming the modest 19% rise of the S&P. I applaud the move and am happier from here sitting on the sidelines.
Finally, let us look at the fundamentals. Policy moves announced so far include interest rate easing, lightening reserve requirements on the banks to encourage lending to the economy, and direct stock market boosting efforts by the China Securities Regulatory Commission (CSRC). The rhetoric is shrill, but the fiscal measures are not particularly detailed. Can the overhang of the Chinese property market be lifted because of a sliver of a percentage point of interest rates? Traders do not care and they have voted with their feet first. Confidence is infectious, and a bit of confidence and Fomo has even led to some early signs of Golden Week property buying in China.
Take the road less travelled
But I fear that retail investors in China who pile in after the Golden Week may be sailing into some headwinds of traders who bought first and will sell into the stampede back into the market.
The Long March by Mao took many twists and turns to avoid direct confrontation with Kuomingtang, which took out many of their rearguards when they were not looking. Some on tired feet fell over the precipice across dangerous mountain crossings. Others succumbed to disease and malnutrition.
As pointed out in last week’s column, value investors can find stocks trading below net asset value (NAV) and cash value in every rebound of the Chinese stock market.
Yanlord Land Group has almost doubled in price from 39 cents to 77 cents. CapitaLand China Trust AU8U has run from mid-60 cents in early September to 88 cents. Yangzijiang Financial Holding YF8 has broken out of its 35-cent slumber to above 40 cents but still below cash value. Sasseur REIT, the best-performing China real estate investment trust, which did not fall by much through Covid, had rallied only about 7%. It may get closer to its IPO price of around 80 cents.
However, after years of Covid and economic policy missteps, it will take a “Long March” for China’s economy to regain full swing and for commercial and residential real estate to recover its values.
However, the world will also not see the same pre-Trump globalised economy. The market gains made over the last two weeks may not be all that Chinese markets have to offer.
For observers of history, we know that Yan’an served as the centre for the Chinese Communist Revolution from 1935 to early 1947. Surviving the Long March to reach Yan’an is no mean feat. From here, however, there is still much work to be done.
Chew Sutat retired from Singapore Exchange S68 after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore
