COVID-19 has been great for Chinese stocks

China is in worse shape than the headline numbers suggest, Hong Kong-based South China Morning Post warned at the end of July.

Don’t underestimate China’s ability to pull whichever fiscal rabbit it wants from a hat for decades before its draconian political system catches up with it, The Economist cautioned on Friday.

Yet when it comes to the country’s biggest listed businesses such as Alibaba, Tencent, Baidu and JD.com, Australian investors can only see dollar signs.

Asian exchange traded funds (ETF), which act as a proxy for China’s biggest companies, are if not beating their February highs then close to.

Asia ETFs from BetaShares (ASX:ASIA), Blackrock (ASX:IAA), and Vanguard (ASX:VAE) are up 58 per cent, 17 per cent, and 10 per cent respectively.

Compare that to Blackrock’s S&P500 ETF (ASX:IVV), which hasn’t yet recovered its February peak and is up 9 per cent this year.

“A great deal of this outperformance can be attributed to Asian economies’ ability to gain control of COVID-19 outbreaks relative to American and European counterparts,” BetaShares’ chief economist David Bassanese told Stockhead.

Since March 2020, reported virus cases in the region have made up less than 20 per cent of the global count, according to John Hopkins data, allowing Asian economies to reopen 75-95 per cent capacity, while the US still stands at 45-60 per cent.”

Given China’s latest move to investigate Australian wine sellers for alleged dumping — which those companies are vigorously denying and experts say is retaliation for the government backing of a WHO investigation into COVID19’s origins and ban on Huawei building the country’s 5G network — some analysts say the best way to access the ‘Chinese growth’ theme is to invest in firms from the inside, rather than in foreign firms trying to get in.

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Chinese tech firms have been one of the most resilient and defensive parts of the Asian market.

Bassanese says online food delivery, consumer product and retail services business Meituan Dianping has seen its user numbers jump by 8.9 per cent year on year to about 450 million, or 120 million more people than the population of the US.

It doubled its share price from the start of the year to June 19 and joined the 10 most valuable companies on the Hong Kong Stock Exchange.

The two largest technology companies in Asia, Chinese digital media and telecoms conglomerate Tencent, and the ‘Amazon of China’ Alibaba have seen their share prices appreciate over the last two months by 27 per cent and 32 per cent respectively.

Swings and roundabouts

China was the first to climb out of a COVID-19 trough, thanks to harsh measures to stamp out new pockets of disease and as a result second quarter GDP was up 3.2 per cent, beating analyst predictions.

Its tech companies are benefiting from the same conditions as those in the US or Australia: as many bricks and mortar businesses effectively shut up shop during lockdown periods, online companies are seeing a massive rise in users and subscribers.

But investing in Chinese companies is not without high risks.

These companies could be shaken if US President Donal Trump follows through with threats to ban more companies, such as Alibaba, from operating in the country after doing so with popular social media app TikTok.

Two weeks ago Trump used an executive order to ban US residents from doing business with WeChat owner Tencent, a move which erased $US34.6bn from the company’s market value and sent the yuan sliding.

His administration has also proposed banning Chinese companies that do not comply with American accounting standards from US stock exchanges, following a series of fraud scandals including Chinese coffeehouse Luckin Coffee and iQiyi.

The recommendations would see Chinese companies delisted from US exchanges if the US Public Company Accounting Oversight Board cannot access their audits — something it cannot do now because the Chinese government has prevented it from auditing companies in the country and banned the sharing of local audit documents.

Outlook for Asia

These risks must be weighed against the lack of growth in the developed world and the fact that the Chinese government is focused on protecting its economy.

“With inflation and interest rates likely to remain low globally over the next year or so and with COVID-related concerns likely to ease by 2021, the outlook for Asian equities remains favourable,” Bassanese said.

“The region is one of the most dynamic and fast-growing in the world, and is well-placed in the global technology sector also.

“Global political tensions with China pose risks but policy makers in China are likely to remain focused on ensuring the economy remains strong through appropriate policy measures.”