Janus Henderson Investors: China – Steady recovery with the prospect of a slowdown | 06/29/20

Key findings:

  • With the flare-up of trade, technology, and now possibly financial wars, China-US relations have deteriorated since the outbreak of COVID-19.
  • The proposed National Security Law in Hong Kong could result in closer economic integration between China and Hong Kong. Hong Kong’s role as China’s gateway to foreign capital should remain unchanged as it is in China’s best interest.
  • China’s recovery, which is reflected in the manufacturing indicators, appears to be stable. However, domestic consumption is lagging behind the recovery in the manufacturing sector and foreign demand is weak, which presents challenges to the overall economy.
  • There are still opportunities for consumer-oriented Chinese companies. Companies are adapting and opening up new channels and sources of income while increasing their cost efficiency. Infrastructure companies with pricing power are an area of ​​relative strength if domestic demand and demand from the rest of the world remain uncertain.

What is the current state of relations between China and the United States?

China was the first country to impose exit restrictions on the outbreak of COVID-19. Accordingly, it was the first country to lift these restrictions and set course for an economic recovery. Relations between China and the United States have deteriorated since the outbreak of COVID-19 as trade, technology, and now possibly financial wars with the United States have flared up again.

US-China trade relations will remain tight, and there are numerous non-trade levers that could potentially set the US in motion. An example of this would be to enforce more extensive controls on technology exports rather than focusing on certain companies, such as Huawei and other companies on the U.S. entity list (which are believed to be contrary to U.S. national security or foreign policy interests) ). Among other things, restrictions on technology companies supplying the Chinese government or the Chinese military could be extended. An attempt could also be made to fill legal gaps that allow US companies that manufacture outside the United States to circumvent existing restrictions. In the long run, this only strengthens China’s determination to achieve independence in its technology supply chain.

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How will new US listing regulations affect Chinese companies?

It is a very topical issue that companies that are majority Chinese-owned can be prevented from listing their shares on US stock exchanges. The U.S. Senate has recently passed a law requiring companies to participate in U.S. regulatory audits. Otherwise, they may be forced to end their listing on US exchanges. For Chinese companies that are already listed in the United States, this is more of a medium-term than an immediate problem, as there is a grace period of three years before delisting. From a practical point of view, delisting in the United States is also a complicated and lengthy process.

It is unclear whether Chinese regulators do not allow companies to view audit records based on “sovereignty”. Many Chinese companies listed in the United States are consumer-oriented companies without state ownership or participation, and are not classified as politically sensitive by China. However, according to Chinese regulations, companies are not allowed to submit their audit documents to a foreign regulator because the business they conduct is in China.

To safeguard themselves, Chinese companies are now increasingly seeking double listing in the US and Hong Kong, as we have seen at Alibaba, NetEase and JD.com. The Hong Kong Stock Exchange offers Chinese companies a viable alternative for access to global capital and investors (even if trading volumes are lower than on the US stock exchanges). The possibility of delisting from US stock exchanges may result in investors charging higher risk premiums for participation in these stocks. However, this does not detract from the overall attractiveness of many Chinese companies with high free cash flows that are currently listed in the United States.

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The complete commentary can be found here in PDF format.

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