Correction in China Equities Is Less Intense in Q2

Different Blends of Chinese Stocks

Recall that the drawdown in Chinese securities did not result in similar return profiles for other markets in 2021. Do returns still diverge so far in 2022?

Amid a downdraft in 2021, we attributed the outperformance of onshore China A-shares to their heavy weights in "old economy" stocks like industrials and basic materials. Offshore markets typically have more exposure to the tech stocks, which were strangled by the new antitrust and data security regulations.

This time around, the value reversal helped the onshore market very little.

Since the beginning of 2022, energy stocks benefited from a global surge in oil demand and became new return drivers for the onshore market. However, issues emerged from the domestic economy, as the perils of an unresolved property debt crisis and mass lockdowns were a drag on value sectors such as developers and banks. Year to date through June, the CSI 300 Index dipped 8%. Although the offshore part of Chinese securities remained in the negative territory, the speed of the fall appeared to be much slower, with indexes dropping 5% to 10%.

Top & Bottom Stocks

Across our coverage, which stocks fueled the Chinese stock rally the most in the past three months?

Shares in New Oriental Education & Technology Group (09901) and TAL Education Group (TAL) saw a major rebound after the authorities banned the private tutoring firms from running for-profit businesses. New Oriental has figured out a new business model to stay afloat, which is incorporating e-commerce sales on its homegrown tech platforms. Thanks to a spillover effect to TAL, both stocks ended the quarter up 60%.

The rest of the list was somewhat related to consumer products and services, riding the rally that resulted after the relaxation of lockdowns in major hubs like Shanghai. Beer and liquor manufacturers Jiangsu Yanghe Brewery (002304), Wuliangye Yibin (000858), and Tsingtao Brewery (600600) took three spots on the top-10 list, for example.

The list of the bottom 10 performers was composed of names from sectors like healthcare, real estate, and technology. Their declines made valuations of these already-cheap companies even more appealing. After a correction of almost 80% in the first half of the year, I-Mab (IMAB) is trading at only 20% of its fair value estimate. The price dislocation made this US-listed biotech the cheapest name in the Chinese markets. Innovative drugmaker Shanghai Junshi Biosciences (01877) experienced a slide of 24% in the second quarter.

Shares in Melco Resorts and Entertainment (MLCO) slid as COVID cases climbed. The stock may remain under pressure as the Macanese government has suspended casino operations as part of the restrictions applied to curb an outbreak.