China’s regulator recently rolled out a set of written guidelines and oral instructions to asset managers, aiming to monitor capital flows more closely and stabilise the financial markets.
“The new rules in China limit the south-bound investments and will therefore have a negative impact on the Hong Kong equity market,” said Robeco’s Victoria Mio. She believes the slowdown will extend to the first half of 2018.
The Stock Connect that links the Hong Kong and China equity markets will not influence Hong Kong’s market as strongly as it did in 2017 due to the inclusion of A-shares onto MSCI’s emerging markets index next year, she added: “As the inclusion of mainland-listed stocks on the [MSCI index] is imminent, Chinese investors might increase their onshore investments and reduce offshore,” Mio said.
Moreover, given expectations of future US interest rate hikes, Chinese investors that are still attracted by the Hong Kong market will focus more on the companies with high US dollar-denominated assets, she believes.
US tax reform and tech
Mio manages a China equity fund with heavy exposure to technology firms. As of the end of October, Alibaba, Tencent, and Baidu were in the fund’s top three holdings, accounting for 25.6% of total assets, according to FE data.
Mio said the Chinese tech giants might be indirectly affected by the tax reform bill in US. The tax reform puts pressure on US companies that have a large operation outside the US or those which have set up an offshore entity to avoid the relatively high US corporate tax rate.
According to the reform proposal, US companies will be taxed at a rate of 35% on their foreign earnings, or they could pay a one-off levy at rate of 14% to repatriate the earnings back to the country for a lower tax rate.
The one-off 14% tax payment for US corporates’ overseas revenue could give a sector-wide shock to US-listed technology companies, including the China-based firms that are listed in the US,” she said.
She said the large-cap Chinese tech firms are now fair-value to their profitability. She is therefore looking at medium-sized tech firms.
In the long run, she is optimistic on the technology sector. “The global economy is entering a cycle where the growth is largely driven by technology advancements, such as 5G mobile network, artificial intelligence, and cloud computing.
In 2018, Mio expects China’s economy to continue to be driven by the growing middle class. The education, tourism and healthcare sectors are likely to benefit the most. She likes a wide array of education companies, ranging from pre-school education to vocational training and online courses.
Three-year performance of the Robeco Chinese Equities Fund vs category average and its benchmark, the MSCI China