Massive Sell-Off of Chinese Stocks – A Market Under Pressure

In recent days, there has been a massive sell-off of Chinese stocks. Stocks in Hong Kong, China, and U.S.-listed ADRs of Chinese companies have lost significant value. The stock prices of several Chinese tech companies have halved since the beginning of the year. The Hang Seng Index lost nearly -6% this morning, resulting in a YtD decline of -21%.

Source: Bloomberg, Data as of 15.03.2022 

Reasons for the Sell-Off

The reasons for the sell-off of Chinese stocks are diverse and, in some cases, very company-specific. However, collectively, they have led to a strong wave of selling at both the individual stock and index levels.

• Regulatory Uncertainty in China: Regulatory changes are not yet complete. Last year, fees for delivery platforms were reduced, Didi HK’s listing was delayed, the suspension of gaming licenses continued, and just yesterday, Tencent was hit with a "record fine" because its WeChat Pay platform violated PBOC rules.
• De-listing Risk of Chinese ADRs: Updates to SEC and HFCAA decisions last week increased the risk of de-listing for China ADRs, causing investors to question their overall exposure to China.
• Geopolitical Risks Related to the Russia/Ukraine Conflict: The U.S. has warned of consequences for Chinese companies that help Russian firms circumvent sanctions. In light of the Russia sanctions, investors are wary of exposure to China, fearing similar risks should tensions escalate.
• COVID-19 Outbreak: A significant increase in COVID-19 cases in China led to the lockdown of large population centers like Shenzhen (17.5 million people) and Jilin Province (24 million people). These restrictions suggest that the zero-COVID policy is unlikely to change soon, which could lead to significant economic costs.
• ESG & Political Considerations: Global sovereign and pension funds have expressed concerns about their China exposure, either due to ESG reasons or political risks, contributing to an excess of supply in the market. 
• Investment Firms: Downgrades of price targets/recommendations by research departments of various banks have further dampened sentiment. For example, last night, JP Morgan simply classified the Chinese internet sector as "uninvestable."

Impact on Chinese Convertible Bond Positions in the H.A.M. GCBF

As in previous years, the fund is currently broadly diversified across regions and therefore has a larger Asia exposure than typical global convertible bond indices. Approximately 20% of the fund is invested in convertible bonds of Chinese companies. Many of the convertible bonds held have low equity sensitivity and exhibit bond-like characteristics with attractive yields to maturity.

Since the beginning of the year, the Chinese convertible bonds held in the fund have declined by -7.8%. This has resulted in a negative performance contribution of -1.8% at the fund level. The underlying stocks of the convertibles lost -23.4% over the same period.

This morning, the Hang Seng Index plunged by -5.7%. The stocks underlying the GCBF positions fell by -5.5%, while the convertible bonds dropped by -1.4%. The decline in the convertibles was less due to the negative equity movements and more driven by the general "risk-off" sentiment, which prompted market makers to widen the bid-ask spreads for convertible bonds and lower their bids by 1 to 2 points. Considering these disruptions, the performance impact on the fund was relatively limited, at -0.3%.

Source: Bloomberg, Data as of 15.03.2022 

The estimated year-to-date performance for the fund amounts to -9.2% (as of March 14, 2022, with the last official valuation price dated March 9, 2022). The performance of the Refinitiv Global Focus Index for the same period stands at -9.8%.

Source: Bloomberg, Data as of 14.03.2022, indicative fund price, since last official NAV from 09.03.22