Chinese A-share market has witnessed a lot of speculation since the start of the current rally in October of last year. The rally started when the PBoC switched to a dovish stance after keeping rates stable for over 2 years. The government while wanting to encourage participation in the equity markets, wants to curtail excessive speculation and volatility. Increased participation in the equity markets will lead to a reduced cost of capital for businesses, which have relied mostly on debt till now, and create a productive outlet for the pile of savings that Chinese households are sitting on.
This Bloomberg article shows that while the Chinese government has been more than successful in getting the retail investors excited about equities, it still has more work to do to reduce the level of speculation. While we avoid participating in speculative plays, we think large-cap SEOs in China offer excellent value, relative to their peers in the developed markets. As the Chinese government continues to reform and improve corporate governance in these companies, the valuation discount should erode. In the meantime, they offer attractive dividend yields in a stable currency regime.
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