China’s Stocks Are Cheap. Why It Could Be Time to Bargain Hunt.

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Some investors haven’t been willing to step back into Chinese stocks even though they are cheap. But that is beginning to change as some of the darkest clouds looming over the market show glimmers of parting—including in the hard-hit technology sector.

There is no sugarcoating the risks . Questions persist on whether Beijing will be able to stabilize its struggling economy and heal its battered property sector, especially as it sticks with its Zero Covid policy. There’s a question on what will emerge from the 20^th Party Congress when the Communist Party selects its leadership this fall and President Xi Jinping is expected to secure a third term. What that could mean for U.S.-China tensions, Taiwan and other human rights and national security concerns is unclear.

But some of investors’ biggest near-term concerns are beginning to ease, especially as policy makers take more steps to suggest the crackdown on technology that clobbered the sector could be coming to an end. Indeed, battered internet stocks hit a three-month high, with the

KraneShares CSI China Internet
exchange-traded fund (ticker: KWEB), up 6% Wednesday as China approved the first big batch of videogames since it limited minors to only three hours of online gaming last summer.

Other signs have also emerged that policy makers want to stabilize Chinese stocks, including

Alibaba Group Holding

(BABA) announcing the country’s biggest buyback, Gavekal Research’s Louis Gave wrote in a note to clients.

With Chinese stocks down 50% or more from last February’s highs,

JPMorgan

strategists this week said many of the risks are in the price. “We have been cautious on China last year and until recently this year, but believe that the risk-reward is finally improving,” the strategists said in a note. They said that Covid case counts were stabilizing, a turn in what they describe as credit impulse and more stimulus ahead—and a turn in Chinese policy from restrictive toward seeking stability.

Chinese policy makers are clearly intent in powering up fiscal and monetary stimulus, with JPMorgan strategists noting that China has only missed its growth targets twice. Economists are skeptical China can hit its 5.5% economic growth target for this year but policy makers are expected to pull out all the stops—and that should offer a catalyst for Chinese stocks. The

iShares MSCI China
(MCHI) ETF is up 3% Wednesday at $55.77 but still down 35% over the past year.

The easing of Covid-related lockdowns that had paralyzed the metropolis of Shanghai offers another catalyst, with the economic damage wrecked by policy makers’ efforts to contain resulting in a rare public parting in views between Xi and premier Li Keqiang.

Even Beijing’s focus on common prosperity that raised concerns that companies may need to sacrifice profits to do more in the service of the government could be de-emphasized, with Gave noting the calls for common prosperity hasn’t been accompanied by actual measures—beyond the backlash to China’s biggest internet titans, including Alibaba’s Jack Ma.

A lot of where Chinese stocks goes next rests on policy—a reason the 20^th Party Congress in the fall will be an important milestone for long-term investors. If Xi gets a third term but has to contend with a clearly designated successor, Gave says markets would likely cheer the outcome as it would suggest the Party’s internal checks and balances have won over Xi’s one-man rule attempts. If Xi consolidates his power with no clear successor, Gave says it would increase China’s political risks domestically and internationally, leaving markets “nonplused.”

“Should the coming months see China turning its back on lockdowns, one-man rule and tech crackdowns, choosing instead to stimulate its domestic economy while also benefiting from increased commodity trade with Russia, then a lot of a conditions would have come together to push Chinese equity markets—and optimism on the broader emerging market space—much higher,” Gave says.

Though most of the attention is on internet stocks like Alibaba and

Tencent Holdings

(700.Hong Kong), which have been battered and are likely to see a near-term bounce, some money managers are favoring other parts of the market tied more to China policy aims.

In a note to clients Goldman Sachs Asia Pacific strategist Alvin So favors stocks in China that can benefit from the global climate change initiative and Chinese government support of emerging industries and technologies. He said valuations have come down over the past year, creating attractive opportunities in companies like chip maker

LONGI Green Energy Technology

(601012.China), electronics components makers

Luxshares Precision Industry

(002475.China), and

BOE Technology Group

(000725.China), and industrial machinery company

Shenzhen Inovance Technology

(300124.China).

Write to Reshma Kapadia at reshma.kapadia@barrons.com