If you were expecting this to be an article which starts out with questions and gradually works its way toward answers, you will be disappointed because we will be answering the question which constitutes the title of this post right from the beginning: the trajectory of Chinese assets after the next financial crisis will most likely be… drum roll, please… downward.
This might seem like a peculiar answer in light of the fact that assets such as shares haven’t been performing amazingly well. Indeed, with for example the US stock market experiencing record-breaking highs, the same cannot be said about Chinese stocks, which crashed after the Great Recession of 2007-2008 (as explained HERE), attempted a recovery up until 2015 but crashed before getting anywhere near 2007’s high (as explained HERE) and then attempted yet another (even more modest) recovery but are not even close to the highs of 2015, let alone the 2007 ones.
Needless to say, Chinese stock holders are anything but happy.
But who are they, anyway? Strangely enough, as mentioned in the article about the 2015-2016 crash which has been linked to previously, they are for the most part retail investors. With over 80% of the trading volume for Chinese stocks taking place between unsophisticated retail investors for whom the very idea of having excess capital to invest is new, we can easily say that the Chinese share market (which has been brought back in the nineties) is anything but mature.
To an inexperienced observer, this constitutes a negative element. After all, it would be the understatement of the (21st) century to claim that China’s stock market underperformed, so who in their right mind would want exposure to an asset class that collapsed in 2007, didn’t manage to reach new highs during its best effort back in 2015 and ultimately went even lower after an even more modest rebound effort?
The answer is simple: a wise contrarian investor.
In other words, an investor who spots an asymmetry between the robust nature of China’s continuous growth (the fact that it is poised to increase its dominance in light of the catching up with the West that still needs to be done on a GDP Per Capita basis represents a compelling additional bonus) and the underperformance of various China-related assets.
At the same time, however, a wise contrarian investor understands that the market can remain “irrational” (to describe a state which revolves around the market allowing the undervaluation of certain assets to persist) a lot longer than even die-hard pessimists anticipate. As such, why try to catch a falling knife rather than let the market come to you? The current situation with respect to underperforming Chinese assets can best be described through a simple sequence of questions:
Are the assets in question currently undervalued?
While we can never be certain, yes, there is a more than reasonable likelihood that the previously-mentioned asymmetry indicates the fact that we are in an undervaluation scenario at this point.
Are they likely to go lower?
When it comes to the strictly domestic dimension, one would be tempted to say that no, the likelihood of them continuously underperforming is not all that great. However, when we factor in the fact that globally-speaking, markets are quite euphoric and there has never been a longer period between let’s say US recessions than the current one, a compelling case can be made that we’re “overdue” a global financial crisis.
What does this mean for Chinese assets?
As discussed at length here on ChinaFund.com, a global financial crisis is quite bearish for Chinese assets, just like it is bearish for any other asset that doesn’t currently enjoy a “safe haven” status. Until China goes from being a “risk-on” jurisdiction to being perceived as a safe haven or “risk-off” one, global financial calamities are overwhelmingly likely to cause further damage, despite certain markets already being depressed.
Might the next global financial crisis represent an excellent buying opportunity for Chinese assets?
In this author’s opinion, yes. A global financial crisis may very well be the final shakeout “problematic” Chinese assets need to establish a firm bottom and embark on a sustainable long-term growth path. The easily-identifiable asymmetries between China’s “real” economy and certain underperforming assets make it clear that the value dimension is there. Add the timing one to the mix (potentially brought about by a global financial calamity) and you might just have a career-defining opportunity on your hands.
Are these aspects set in stone?
Of course not, as markets tend to be notoriously hard to predict. To conclude, however, let’s just say that if circumstances similar to the ones outlined in this article present themselves (and ChinaFund.com will, of course, be keeping an eye out for them), the case for pulling the trigger in favor of underperforming Chinese assets (or, frankly, Chinese assets in general) becomes quite hard to resist.