Stability will be a buzzword for China in 2022, with President Xi Jinping set to win a third five-year term, Chinese-U.S. relations stuck in competition mode and Beijing easing monetary and fiscal policy to keep growth on an even keel.
One thing poised to change, however, is overseas investors' appetite for mainland-listed A shares, after a barrage of regulatory changes under Mr. Xi's "common prosperity" banner battered the market value of the country's highest-profile companies last year.
Beijing's policy revamp — which reached a crescendo in July when regulators ordered after-school tutoring companies worth tens of billions of dollars to become non-profit entities — made China a no-show this year at what proved to be a global stock market party, powered by economic recoveries from pandemic-induced shutdowns.
But Chinese stocks didn't suffer across the board, delivering starkly different outcomes depending on where they were domiciled.
Chinese companies with U.S.-listed American depository receipts, including the country's e-commerce giants, plunged 38% for the year, while companies with H-share listings in Hong Kong, including a number of financial conglomerates, edged down 2.7%, noted Christian McCormick, Denver-based director and product specialist for Chinese equities with Allianz Global Investors, which had €647 billion ($753.2 billion) of AUM as of Sept. 30.
By contrast, the MSCI China A Onshore index, with companies more focused on domestic demand and consumption, rose 4.03% — a "massive dispersion," he said.
If China's stock market has largely been viewed until now as a monolithic block, the past year's results could prompt institutional investors to do a deeper dive on the structural differences in those respective domiciles and rethink their reliance on ADR and H share-dominated benchmarks, Mr. McCormick said.
There's a lot of focus now on those different opportunity sets, with the exposure A shares provide to China's fast-growing domestic consumer market garnering attention, agreed Alexander Davey, Hong Kong-based global capability head for active and quantitative equities at HSBC Asset Management. HSBC managed $619 billion in assets as of Sept. 30.
Meanwhile, there are growing expectations that the three-pronged structure of China's listed stock universe could increasingly become two-pronged, as U.S. regulators make the price of continued Wall Street listings for Chinese companies their willingness to open their books to U.S. auditors. Beijing, in response, is putting growing pressure on Chinese companies to move their listings to Hong Kong.
The odds of Chinese companies increasingly relying on only two listing domiciles are "very high," predicted Allianz's Mr. McCormick, leaving investors facing a "fascinating investment experiment with a lot of variables" over the coming year or two. Ultimately, the process should be a boon for both the A-shares and H-shares markets, he said.
HSBC's Mr. Davey said structurally, "institutional investors will be putting more money into China and I think that's likely to be heavily focused into A (shares), and to a degree the evolving H-share market if we see some companies (trading in New York) starting to relist" there.
For now, the scars from the past year's sell-off continue to weigh on the minds of institutional investors, in particular those in the U.S., money managers said.
The market remains gripped by uncertainty, even though the policy reset that China's government is pursuing has been well telegraphed, with understandable goals, said Tiffany Hsiao, a managing director and portfolio manager with Milwaukee-based Artisan Partners Ltd. Artisan had $169.2 billion in AUM as of Nov. 30.
Amid all the "noise, nobody wants to do proper due diligence," she said. Even so, continued strong earnings growth of well over 20% for A-shares companies in 2022 should pave the way for a "sentiment pivot," Ms. Hsiao predicted.
Meanwhile, anticipated monetary and fiscal policy easing by Beijing in 2022 to steady an economy that's slowed considerably under the weight of steps taken to rein in an overheating real estate market will provide a boost for domestic demand-focused companies in China just as other major markets, led by the U.S., are tightening policy, analysts predicted.