By Nicole Hong
For an increasing minority of foreign investors, now is the
perfect time to scoop up Chinese stocks.
Chinese shares have dropped to their cheapest levels in three
years as the world's second-largest economy posted growth of 7.6%
in the second quarter, its slowest growth since early 2009. At the
same time, the yuan is 1% lower against the dollar this year after
it had appreciated 4.7% last year.
But instead of viewing the deterioration as a sign to get out of
the battered Chinese market, the now discounted valuations are
driving in more foreign investors. This month, foreign investors
became net buyers of Chinese equities in consecutive weeks for the
first time since February, with Chinese equity funds pulling in
$98.22 million in the two weeks up to Aug. 22, according to fund
tracker EPFR Global.
This buying, partly based on a belief that Chinese leaders will
take action to stimulate the economy, could support the yuan from
further depreciation.
"Monetary stimulus will provide some lift to valuations to
China," said Rick Harper, head of fixed income and currencies at
New York-based WisdomTree Investments, and one of those scooping up
more Chinese stocks.
The $4.1 billion WisdomTree Emerging Market Equity Fund (DEM)
more than tripled its percentage of Chinese stocks to 14% in June,
during its annual rebalance. The portfolio had been underweight
China for five years because it only includes stocks that are among
the 30% cheapest in emerging markets.
Among its picks, the fund added heavily in Chinese bank stocks
with dividend yields above 5%, including China Construction Bank
Corp., which is now the fund's top holding.
To be sure, foreign investors remain net Chinese equity sellers
on the year, with $670.67 million in outflows. These outflows have
helped the Shanghai Composite Index fall 21% over the past 12
months and lose 5.7% this year, hitting a fresh three-year low on
Monday.
But recently, large buyers have started to emerge.
China's growth remains well above those of other large nations,
while investors have used the weaker yuan as a cheap entry into a
heavy dividend-producing stock market. The average dividend yield
on Chinese stocks on the MSCI Emerging Markets Index is 3.1%,
compared with 2.1% for the Standard & Poor's 500 Index.
That ratio is set to increase after the Shanghai Stock Exchange
released new guidelines in mid-August that state a company will
receive preferential treatment in financing if its dividend payout
exceeds 50% of net profit.
Policy action from China could further boost stocks, investors
say. London research firm Capital Economics forecasts Chinese
policy makers will cut both benchmark interest rates and required
reserve ratios by Sept. 30. China's government is already injecting
capital into infrastructure projects in railways and energy
conservation, with major Chinese cities set to roll out their own
stimulus plans.
"China's got a lot of policy tools at its disposal, so we've
never been worried about growth decelerating too much," said Marc
Tommasi, head of global investment strategy at Rochester,
N.Y.-based Manning & Napier, which manages $40 billion in
assets and recently added Chinese stocks to its portfolio.
Mr. Tommasi's latest buy was Tsingtao Brewery Co. as the Chinese
beer maker stands to benefit from an increase in domestic
consumption, he said.
Write to Nicole Hong at nicole.hong@dowjones.com.
