China stock pickers reshape portfolios on Xi's 'common prosperity'

Xinyi Solar Holdings

02/11/2021 06:02

By Samuel Shen and Vidya Ranganathan
    SHANGHAI, Nov 2 (Reuters) - Chinese stock market investors
are swapping big tech names for "small giants" and luxury brands
for mass market companies, aiming to cash in on President Xi
Jinping's "common prosperity"  plan for the economy.
    The intent behind Xi's drive is a narrower gap between the
rich and poor in the world's second largest economy. 
    But the first policy moves rattled markets as authorities
introduced heavy new regulations on industries such as
technology, property and private tuition, sending shares in
those sectors tumbling.
    While some active fund managers have shunned China for the
time being, others see opportunity in an economy aiming for a
larger and richer middle class.
    Chinese policymakers "are talking about how to go from a
pear-shaped type of economy, which is bottom-heavy, top-light,
into an olive shape," said Ronald Chan, Hong Kong-based Asia
head of equities at Manulife Investment Management. "They are
talking about how to split the pie going forward." 
    "Common prosperity" also embodies China's desire for
self-sufficiency in technology and energy and for industry to
move up the value chain, said Chan, who has been buying Chinese
solar energy companies while avoiding luxury spirit brands. 
    Manulife's Greater China funds  LP65077836   LP68262586 
have also slashed holdings in tech giants such as Alibaba
 9988.HK  and Tencent  0700.HK  over the past year, according to
public disclosures.
    While it is difficult to estimate how big overall investment
swings have been - particularly as passively managed funds
continue to seek stock index heavyweights - market moves have
been sharp.
    China's new energy index  .CSI000941  has surged more than
70% this year, while the property sector  .CSI000006  is down
over 10%. 
    Among tech companies, those offering "hard" products and
components have performed better than "soft technology", such as
online providers. 
    The KraneShares CSI China Internet ETF  KWEB.K  has plunged
nearly 40% so far this year, while China's start-up board
ChiNext  .CHINEXTC  is up 13% and Shanghai's hardware-heavy STAR
Market, has barely budged.
    "We've seen a lot of very extreme sentiment on China. Is it
going back to Maoism? Is it investible?" said William Sterling,
global strategist at GW&K Investment Management, which invests
in emerging markets including China. 
    "It seems very, very unlikely that even with these new
policy initiatives, the government would want to throw away the
dynamism of the economy that the country's capitalist engine has
created."
    Sterling bets Chinese consumer stocks will benefit from a
growing middle class, but is avoiding property firms and related
sectors such as cement and steel.   
     DIVERGING FORTUNES 
    Goldman Sachs has picked 50 "common prosperity" stocks in
sectors including green and renewable energy, hard technology,
higher-end manufacturing and mass but unique consumption brands.
    Its list includes indigenous brands such as Xiaomi  1810.HK 
and Li Ning  2331.HK , chip makers Will Semiconductor
 603501.SS  and Hua Hong Semiconductor  1347.HK , as well as
green energy companies LONGI Green Energy  601012.SS  and Xinyi
Solar  0968.HK . 
    Goldman advises investors to shun sectors vulnerable to
regulatory headwinds including luxury consumption, soft tech
with high data intensity, along with education, property, media
and entertainment. 
    Investors are already piling into electric vehicles and
chipmakers.
    China Universal CSI New Energy Vehicle Industry Index ETF
 501057.SS  has seen its assets under management (AUM) nearly
triple to 9 billion yuan ($1.41 billion) this year, while the
Guotai CES China Semiconductor Chips ETF  LP68583493  has
witnessed a near doubling in AUM.    
    Societe Generale has a "common prosperity" basket of 30
stocks, which includes consumer companies such as China Tourism
 601888.SS , Anta Sports  2020.HK  and Gree Electric
 000651.SZ , as well as tech firms including Luxshare Precision
 002475.SZ  and Nari Technology  600406.SS . 
    In the medium term, "common prosperity" will improve the
purchasing power of the lower-middle income group in China,
therefore benefiting consumer staples and the service sector
including tourism, catering and affordable healthcare, said Caro
Liao, China economist at bond fund giant PIMCO. 
    "In the long run, a properly regulated business environment
likely will benefit all investors, by reducing vulnerabilities
in the system and ensuring a sustainable growth path."    

($1 = 6.3999 Chinese yuan renminbi)

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Small caps vs large caps under Common Prosperity    https://tmsnrt.rs/3ExgiId
Winners vs losers under Common Prosperity    https://tmsnrt.rs/3pZilRp
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 (Reporting by Samuel Shen
Additional reporting by Vidya Ranganathan in Singapore
Editing by Lincoln Feast.)
 ((samuel.shen@thomsonreuters.com;  +86 21 20830018; Reuters
Messaging: samuel.shen.thomsonreuters.com@reuters.net))