Chinese equities had a difficult year in 2021. In the mainland, the China A50 index dropped by more than 2%, while in Hong Kong, the blue-chip Hang Seng index tumbled by more than 10.7%. In contrast, in the United States, the S&P 500 index surged over 28% while the Nasdaq 100 exceeded 25%.

China A50 vs Hang Seng in 2021

In this article, we will look at the reasons why Chinese equities struggled and whether the China A50 and HSI index will recover in 2022.

Why China A50 and HSI struggled

There are a number of reasons why the China A50 and Hang Seng index struggled in 2021. Let us look at some of them.

Real estate woes

The property market in China is a major industry that accounts for a substantial part of the economy. As a result, property companies form a major part of the Hang Seng, A50, and the Shanghai Composite indices. 

After experiencing explosive growth in the past few decades, the industry started to unravel in 2021 after Beijing started a crackdown on the sector. The key issue was that the sector was mostly fueled by excessive debt. As such, the government directed property companies to start deleveraging.

In the aftermath, many property companies started struggling. The best-known name was Evergrande, the second-biggest property developer in the country. It has more than $300 billion in liabilities and has missed several debt repayments.

Other real estate companies have also been affected. They include Kaisa, China Fortune Land, and Fantasia have also struggled. 

This explains why companies with exposure to the sector have underperformed. For example, the worst-performing companies in the China A50 index are Ping An Insurance, New China Life Insurance, China Vanke, and China Pacific Insurance. 

The same trend happened in Hong Kong, where companies with exposure to the property market lagged. They include Country Garden, Hang Lung, and New World.

Technology crackdown

Another reason why China equities declined was the crackdown on the technology sector. This factor affected Hang Seng more than it did the A50 index because it has more tech firms. 

Some of the regulations that were implemented had a direct impact on key tech firms. For example, companies like Alibaba and JD were forced to share data and implement measures to increase competition. Alibaba was even fined billions of dollars. Companies like Meituan were also asked to start classifying their riders as employees.

In 2021, Beijing implemented a number of sector regulations as it tried to curb the sector’s power. As a result, the worst performers in Hang Seng are tech giants like Alibaba, Xiaomi, Meituan, and JD.

Gambling crackdown

Macau has grown to become the biggest gambling center in the world. It passed Las Vegas a decade ago and is now home to the biggest firms in the industry. While gambling is illegal in mainland China, it is legal in Macau. 

Beijing announced a major crackdown on the gambling sector in 2021. The concerns are that laundered money from mainland China was being “cleaned” in Macau. 

Subsequently, gambling giants like Sands China and Galaxy Entertainment were among the worst-performing stocks in Hang Seng 2021.

Other reasons why Chinese equities lagged were the ongoing tensions between China and Western countries like the United States. These tensions led more global investors to reduce their exposure to China.

A50 and Hang Seng outlook for 2022

There is an ongoing fear among global investors when it comes to investing in China. Indeed, China has barred western venture capital firms from investing in some sensitive companies. At the same time, many Western investors have been burned by the performance of many Chinese companies like DiDi, Alibaba, and TAL Education.

Still, there is a likelihood that Chinese equities will recover in 2022, although they are expected to be more volatile than their western peers. 

First, the valuations of many companies in China, especially in the Hang Seng index, are substantially lower than in the United States. 

A good example of this is a company like Alibaba that is dual-listed in New York and in Hong Kong. Alibaba is a leader in e-commerce, fintech, and cloud computing, and its market capitalization is just $316 billion. 

Yet, Alibaba is slightly smaller than Amazon in terms of revenue and profitability. For example, Alibaba made revenue of $200 billion in the most recent quarter and a profit of more than $5.7 billion. The profit was this low because of one-time payments. 

Amazon, on the other hand, had revenue of $110 billion and a net income of $3.16 billion. Yet, Amazon is valued at over $1.72 trillion. The same situation can be seen in other Chinese tech companies in the HSI index.

Second, there is a likelihood that the risks posed by China have been priced in by the market. For example, investors already know that the property market in China is in trouble. They also know that the regulators will continue focusing on the tech sector. 

On the positive side, the Chinese government will likely slow down on making more regulatory changes. Besides, they are having a negative impact on the economy.

Third, international demand for China-made products will keep rising in the coming year. In 2021, a major concern among investors was the supply chain disruptions. Therefore, as the global economy reopens, there is a likelihood that the country will see more demand. As such, there is a possibility that the China A50 will bounce back to about 17,000 CNY from the current 15,900 while the HSI index will rise to H$25,000 from the current H$23,900.

Summary

Chinese equities lagged the broader market in 2021 as Chinese authorities intensified their regulations on technology, real estate, and gambling sectors. This crackdown has led to most stocks in the Hang Seng and A50 being a bit undervalued. For example, the Hang Seng index has an average PE ratio of about 15, while the S&P 500 has a multiple of about 30. Therefore, there is a possibility that investors will rush to buy the dip in 2022.