Investors remain conservative on China’s stock market
February 18, 2022

In 2021 Q4, respondents to the Cheung Kong Investor Sentiment Survey continued their conservative expectations for China’s A shares with 60.2% of the respondents believing that A-shares will rise in the next 12 months, a decrease of 0.8 percentage points from the 2021 Q3 survey and a decrease of 7.3 percentage points from the same period last year. Respondents did not have high expectations for the A-shares in the next 12 months with an average expectation of -0.8%, which is only 0.1 percentage points higher than the previous quarter, and 2.6 percentage points lower than the survey the year before.

Respondents also lowered their expectations for real estate compared with late 2020. 55.9% of respondents believe that housing prices in first- and second-tier cities will rise in the next 12 months, down 13.5 percentage points from the survey at the end of 2020. The expected return on home prices is 1.4%, down 2.2 percentage points from the end of 2020.

Respondents’ conservative sentiment towards the market may come from concerns about long-term economic growth. In 2021 Q4, respondents lowered their expectations for long-term economic growth. 58.9% of respondents believe that GDP growth will exceed 5% in the next five years, a decrease of 3.8 percentage points from the previous quarter. The average expected growth rate of GDP was 5.4%, a decrease of 0.2 percentage points from the previous quarter.

Similar to the previous quarter, financial practitioners and retail investors had very different sentiments on investment and the macro economy. Financial practitioners are more optimistic than retail investors. Regarding the trend of A-shares in the next 12 months, 52.8% of retail investors believe that they will rise, compared to 83.5% of financial practitioners. The expected return of A-shares in the next 12 months for retail investors are -3.2%, while financial practitioners are 6.6%. Only 49.2% of retail investors believe that housing prices in first- and second-tier cities will rise in the next 12 months, compared to 77% of financial practitioners. The expected return on house prices in the next 12 months is 0.8% for retail investors and 3.5% for financial practitioners.

The “Cheung Kong Graduate School of Business Investor Sentiment Survey (CKISS)” report is a survey of investor sentiment and expectations in China’s capital market. It is based on a large sample survey of approximately 2,500 investors from 13 important cities in China. The Q4 survey findings was based on data collected in December 2021, as well as financial reports of A-share listed companies collected in the third quarter of 2021, and other latest domestic and foreign capital market and macro data. The report is divided into two parts: the first part uses questionnaires to understand investors’ views on the future trend of asset prices such as the stock market and real estate, as well as their expectations on macro indicators such as economic growth; the second part combines macroeconomics and data from listed companies which are used to analyse the reasons for the investor sentiment.

Respondents’ expect China’s inflation remain stable despite soaring inflation in Europe and the United States.

A big change in 2021 is the soaring inflation in Europe and the United States: as of November 2021, the US CPI increased by 6.8% year-on-year, and the euro area increased by 4.9% year-on-year, of which Germany has increased by 6% and France has increased by 3.4%. The CPI has reached the highest level for the first time since the oil crisis in the mid-1970s and the U.S. savings and loan crisis in the early 1980s.

Although inflation is currently a global risk, China’s CPI is not high, and the year-on-year growth rate at the end of November was only 2.4%. PPI experienced a year-on-year increase of 13% due to its global linkage. Respondents lowered their expectations for domestic inflation. 3.5% of the respondents believed that high inflation of more than 6% would occur (3.9% for retail investors and 2.2% for the financial industry), an increase of 0.3 percentage points from the previous quarter. (Retail investors and the financial sector increased by 0.2 and 0.7 percentage points, respectively). The expected growth rate of prices in this period is 2.5% (2.5% for both retail investors and the financial industry), which is the same as the previous period.

Respondents overall lowered their expectations for long-term economic growth, in line with the government’s overall judgment of the economy.

Respondents’ conservative sentiment towards the market comes from concerns about long-term economic growth. 58.9% of respondents believed that future GDP growth could exceed 5% ( Retail investors and financial industry were 56.6% and 65.8% respectively), a decrease of 3.8 percentage points from the previous period (retail investors and financial industry were down 4.1 and 3 percentage points respectively); the expected growth rate of GDP was 5.4% (retail investors and financial industry respectively 5.3% and 5.5%), a decrease of 0.2 percentage points from the previous period (retail investors and financial industry decreased by 0.2 and 0.1 percentage points respectively).

These findings are in line with the government’s overall judgment of the economy. Although the overall economic growth rate in 2021 is 8.1%, from the first quarter to the fourth quarter, the growth rate has been in a downward trend, of which the year-on-year growth rate in the fourth quarter was only 4%. The Central Economic Work Conference held from December 8th to 10th made a new prediction of China’s economic situation and put forward three severe challenges facing the economy – supply chain disruptions, demand contraction, and weakening expectations. Our data identified weaker expectations in the first quarter of 2021, and developments in subsequent quarters have continued this trend.

A functioning capital market is a strong indicator on the health of the economy. Our survey found that investors continued to lower their expectations for the future in 2021, providing useful economic data. The survey found that the pressure on China’s capital market mainly comes from seven factors including international pressure and domestic policy adjustment, specifically:

  • 1. Omicron has become the mainstream variant, and existing vaccines do not provide good protection against infection of Omicron. The good news is that Omicron appears to be less virulent than previous variants in terms of severity and mortality, while protection against severe disease and death from existing vaccines remains high. Omicron is likely to make most people in Europe and the United States immune to coronavirus in some sense: either because of vaccines or because of infection. China’s zero-tolerance strategy has meant China has had a very low infection rate, but at the same time, this policy has also meant paying a huge price economically, especially in the service industries, such as transportation, catering, accommodation, and tourism. The highly contagiousness variant of Omicron will undoubtedly pose unprecedented challenges to such a policy.
  • 2. High global inflation. On the supply side, the pandemic has severely impacted the global supply chain. As of 2021 Q3, investment activities in most of the world are still lower than pre-pandemic levels; the production of bulk commodities and trade in services have not fully recovered, with only the trade in goods reaching pre-pandemic levels. Different regions have also faced different levels of recovery. East Asia and Southeast Asia have recovered better than North America, Europe, South America, and Africa. On the demand side, Europe and the United States have introduced extremely loose fiscal and monetary policies. At present, the inflation level in Europe and the United States has returned to the highest point in the past four decades, which has brought huge pressure to the central banks of various countries. In the short term, aggregate demand will inevitably be under pressure.
  • 3. Prudent and tight fiscal and monetary policies. In response to the coronavirus, China has been extremely prudent in both fiscal and monetary policy. Especially in 2021, China’s overall debt-to-GDP ratio remained basically unchanged. This is a very conservative approach, compared to other countries. In 2021, Europe, the United States, and Japan have all continued to maintain ultra-loose monetary policies. The assets of the central banks of the United States, Japan and the European Union have far exceeded the financial crisis period. If we look at the proportion of increase in broad money in the GDP of countries from the end of 2019 to November 2021, the United States, France and the United Kingdom have increased by more than 20 percentage points, Japan and Germany have increased by 18 and 11 percentage points respectively, while China only increased by 7 percentage points.
  • 4. The adjustment of real estate policies. 2021 can be described as the most stringent year for real estate regulation in recent years. In line with the principle of “housing, not speculating,” the regulator launched the “three red lines” policy in August 2020 to control the short-term and long-term leverage ratios of real estate companies, and at the same time proposed a series of policies for financial institutions to tighten real estate. As the financing of China’s real estate industry has long relied on the banking system and operates with high leverage as a whole, the tightening policy not only caused the real estate sales price and sales volume to plummet, but also caused the real estate industry to suddenly fall into a liquidity crisis. Among them, companies with excessive leverage, such as Evergrande, suddenly fell into a debt crisis. The debt crisis sent shock waves from up and down the industry. Since the real estate industry and its upstream and downstream accounts for about 30% of China’s GDP, this severe impact will naturally directly affect investor sentiment and expectations.
  • 5. Antitrust regulations against tech giants. This is a trend we are seeing all around the world but China’s antitrust regulations have greatly surpassed those in the West in intensity and breadth. The restrictions and penalties imposed by the Chinese government and regulatory authorities on Internet giants are comprehensive. In fact, these measures can be clearly seen in the stock price: in 2021, Alibaba’s stock price fell by nearly 50%, Pinduoduo fell by 67%, and Tencent, and Meituan all fell by about 20%.
  • 6. The education training industry has undergone the most radical restructuring in decades. Under the guidance of the “double reduction” policy, the education and training industry has basically achieved decapitalization in just a few months. Due to the competitive nature of China’s education system, it remains to be seen whether the new education policy will relieve pressure on children. However the listing price of companies in this sector lost 80% of their investment value in 2021, which will have an impact on employment and consumption.
  • 7. In the long run, the emphasis on “common prosperity” may be the most significant policy both socially and economically. Narrowing the gap between rich and poor is a major global issue. In China, it is the basic requirement of socialist ideology. In addition to political factors, common prosperity is also the core requirement for the further development of China’s economy. China must overcome the so-called middle-income trap and develop from a middle-income developing country to a high-income developed country through technological development and industrial upgrade. Expanding the middle class and reducing the gap between the rich and the poor will help boost domestic demand and facilitate this ambition. However, since common prosperity requires profound structural adjustments to taxation and the economy, its impact on the capital market is still unclear.

These seven factors mentioned above mean that uncertainty is expected in capital markets in 2022. However, with China’s expected easing of its monetary policy and domestic structural reforms, capital markets could be bottoming out.

The Cheung Kong Investor Sentiment Survey (CKISS) is a survey on investor sentiment and expectations in the capital market, co-sponsored by Cheung Kong Graduate School of Business’ (CKGSB) Center for Investment Research and the Business Scholars Program. It is led by Doctor Liu Jing, CKGSB Professor of Accounting and Finance, and CKGSB researcher Chen Hongya.

The first survey was conducted in January 2018 and targeted over 60 outstanding entrepreneurs. In August 2018, the survey expanded its scope to 13 major Chinese cities and conducted on a quarterly basis with approximately 2,500 valid samples, including 1,900 samples from individual investors and 600 from institutional investors. The Center for Investment Research at CKGSB aims to offer a more comprehensive understanding of the capital markets in China and abroad using CKGSB’s unique theoretical & practical perspective.

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