China trusts rally as Beijing tries to reassure investors

JPMorgan China Growth & Income jumps 6% after 5% gains in Baillie Gifford China Growth and Fidelity China Special Situations yesterday, but political risks remain.

China investment trusts have begun to rally as Beijing attempts to placate jittery investors after a sell-off in the country’s internet stocks threatened to spiral out of control.

JPMorgan China Growth & Income (JCGI ) has jumped nearly 6% as bargain hunters seized an opportunity to buy the £453m investment trust on a cheap valuation.

Today’s 5.7%, or 31p, gain to 576p came after the closed-end fund lead managed by Howard Wang fell to a 7% discount on Wednesday’s close despite a 2.8% rise on the day, according to data from Numis Securities.

This was enough to put JCGI on the broker’s ‘cheap’ list with a ‘Z-score’ of -1.7.

Z-scores - which form the basis of our weekly Trust Watch reports - are a measure used by analysts to determine whether an investment is significantly outside its normal trading range. A score of -2 or below is viewed as cheap, while 2 or more is regarded as expensive.

JCGI’s almost-cheap Z-score followed a torrid week for the trust, whose asset value tumbled over 13% after China spooked investors with a clampdown on private tuition firms and internet giant Tencent.

Today Chinese officials urged foreign investors not to ‘over interpret’ their recent regulatory actions.

JCGI’s advance follows rival Fidelity China Special Situations (FCSS ) and Baillie Gifford China Growth (BGCG ), which both rallied over 5% yesterday.

FCSS, whose fund manager Dale Nicholls discussed the regulatory pressures on Chinese internet giants at a Citywire virtual event last week, is up 2%, or 7.5p, to 367.5p today.

After yesterday’s gain it remained 6.6% down over a week. However, shares in the £1.8bn trust look well supported, closing on a 3.2% premium and 2.2 Z-score that places it on Numis’ ‘expensive’ list. The trust’s underlying net asset value (NAV) had also fallen nearly 13% over the week.

Meanwhile, BGCG gained 3%, or 12.9p, to 441.9p this morning, having closed on a 7% premium above NAV yesterday. Like FCSS, the £266m trust managed by Sophie Earnshaw and Roderick Snell avoided a shareholder panic, with the shares marked down 6.7%, nearly half the 12.6% slide in the underlying portfolio.

Asia trusts caught up in the turbulence also began a tentative recovery.

Pacific Horizon (PHI ) put back 2.9%, or 23p, to 815p today, having fallen 6.2% in the previous week. The top-performer closed yesterday 3.8% above NAV, a reduced premium compared to the one-year average of 8%, which reflects recent market uncertainty and the departure of lead fund manager Ewan Markson-Brown last month.

JPMorgan Asia Growth & Income (JAGI ) was up 2.4%, or 11p, to 464p, having fallen 6.9% in the week. It stood on a 1.1% premium on Wednesday.

Aberdeen New Dawn (ABD ), which had fallen over 5.2% in the week, added 1.9%, or 6p, to 319p. It stood on an 11% discount yesterday in line with its one-year average.

Relief combined with doubts

China’s move to soothe nervous global investors after the effective ban on the private tutoring sector saw its securities regulator hold a call on Wednesday night with Wall Street banks and asset managers, including BlackRock, Fidelity, Goldman Sachs and JPMorgan.

According to reports, Chinese regulators sought to reassure them that the attack on education technology businesses was an isolated situation and wider regulations would be introduced more steadily.

This relieved investors in Hong Kong, where Alibaba rose 7.7% while Tencent jumped 10%, though the social media market leader still remains more than 7% down this week. It announced on Tuesday that registrations were being suspended for its main WeChat app in response to tighter rules on data storage.

China’s blue-chip CSI 300 index gained 1.9%, while a tech bounce drove Hong Kong’s Hang Seng index to a 3.3% rise.  

Doubts remain, however. Despite China’s committment to allowing companies to access capital markets, there are questions about whether the authorities will continue to clampdown on the ‘variable interest entity’ corporate structure used by many large Chinese companies to list in the US and overseas. Often based in the Cayman Islands tax haven, these are holding companies giving foreign investors an economic interest in Chinese businesses without any control.

The ban on education companies making a profit prohibits use of the structure. It came amid a slew of recent crackdowns. The scrutiny on data security upended Chinese ride-hailing giant Didi Chuxing’s New York initial public offering a month ago.

This week also saw food delivery company Meituan’s shares sink over 30% after the authorities issued new guidelines on delivery workers.

Watch your toes in China

Ronald Chan, founder of Hong Kong asset manager Chartwell Capital, said he did not believe investing in China had become riskier today, but the developments were a reminder that investing in the country can be a case of ‘two steps forward, one step back’.

‘Political risk has always been an overhang, and there are no surprises that central government wanted to reign in cannibalising, monopolistic market tendencies,’ said Chan, who is also a listing committee member on the Hong Kong Stock Exchange panel.

‘If investors are going to dance with China to capture the development and growth of the country, they need to expect to get their toes stood on occasionally,’ he added.

John Malloy, manager of the RWC Global Emerging Markets fund, said while the government’s crackdown on the education sector was ‘pretty stunning’, there will start to be a slowdown in state intervention. Like the China trusts, the fund sold out of its one education business previously, partly in anticipation of changes.

‘They’re rolling through regulation in certain parts of the economy and they’ve done this historically when the economy’s in good shape. They’ve done it a few times over the past 10 years,’ said the Citywire A-rated manager.   

Malloy said we were ‘probably three quarters of the way through’ this latest wave of regulation, which largely represents looking after the interest of the Chinese lower and middle classes after widening inequality. ‘At some point they’ll probably hit on all the areas and we’ll kind of move on,’ he said.

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