China’s shares are cheap

• BNP Paribas Markets
  

China was long regarded as a guarantor of growth and success. But those days seem to be over. Current figures on production, investment and retail sales show that China’s economy is developing comparatively weakly. In July, for example, production in Chinese factories and mines rose by 5.7% compared to the previous year, but this was the weakest growth since last November. There are several reasons for this, such as the trade tariffs announced by Donald Trump, some of which have already been implemented, which make Chinese goods more expensive to import into the US. The tariff dispute is also weighing on global trade, which is also hitting China hard as the country exports many products.

China is catching up despite some problems

However, not all disruptive factors are external in nature; some are also home-made, such as overproduction in some industrial sectors such as the manufacture of electric cars. Scrappage schemes and financial purchase incentives have led to artificially inflated demand in the Chinese car market. The subsidies have made new cars so cheap that it is worthwhile for used car dealers to buy new cars and offer them as used cars at a substantial discount. The manufacturers of e-cars, which are also subsidized by state funds, are initially benefiting from this as they can maintain their sales figures, but in the medium term there is a risk of a severe setback if state funds are cut. Car prices have already come under extreme pressure and it is assumed that some car manufacturers can only survive because they are supported by government funding.

But that is only one side of the coin, the other is that China is and will remain an important player in the global economy, with growing success. The country has long since developed from a “workbench for the global economy” into a supplier of high-tech products. With DeepSeek, China was recently able to present an adequate product in the field of artificial intelligence that competes with the American ChatGPT. And China is now also playing a leading role in robotics, as the world championship for human-like robots held in Beijing a few days ago impressively demonstrates.

Equity markets are valued low

Against this backdrop, it is particularly interesting that Chinese equities are currently valued relatively cheaply compared to American and European equities. The price-to-book ratio, or P/B ratio, of the MSCI China Index is 1.7, the price-to-earnings ratio, or P/E ratio, is 13, while its US counterpart has a P/B ratio of 4.7 and a P/E ratio of 25, and the MSCI Europe 2.2 and 17 respectively.

On the one hand, the valuation discount is justified due to the increased risks such as overcapacity in the e-car market, but on the other hand it is still attractive because Beijing appears to be aiming to increase equity valuations in order to support domestic consumption. This includes the introduction of a swap facility at the People’s Bank of China (PBOC), which enables securities firms, insurance companies and funds to obtain liquidity from the central bank to buy shares. It will also set up a special credit facility for listed companies and major shareholders so that they can buy back shares and increase their holdings. According to the Beijing government, both measures can be increased “indefinitely” at any time. Observers see this as a clear indication that the decision-makers are pursuing a strategy of reflation for the investment markets.

This speaks in favor of an investment in the Hang Seng China Enterprises Index, HSCEI for short, also known as the H-share index. The index focuses on Chinese companies listed on the Hong Kong stock exchange and, alongside the Shanghai Stock Exchange Composite Index, is one of the most important benchmark indices on the Chinese stock market.

BNP Paribas also offers products on the Hang Seng Index, HSI for short. In contrast to the Hang Seng China Enterprises Index, the Hang Seng Index represents Hong Kong-based companies and covers a broader range of stocks, including non-Chinese companies.