Key Takeaways

Since the Chinese New Year (February 9, 2024), when China fired the head of its securities regulator, the Chinese Securities Regulatory Commission (CSRC), China’s equity market has experienced a surge in price momentum.

The recently appointed head of the CSRC has introduced shareholder-focused policies emphasizing higher dividend payouts and share buybacks. These policies have gained popularity among local investors. Notably, the CSRC now expects profitable companies to distribute dividends regularly, a practice that was not common in China.

Additionally, the CSRC treats share buybacks as equivalent to dividends when rewarding investors. Furthermore, the CSRC aims to encourage retail participation in the capital market by implementing policies that benefit shareholders, subtly hoping to attract retail capital that is concentrated in real estate investments.

China’s momentum is fueled by better-than-expected economic data, government support for the capital market and policy announcements. Notably, the government has focused on aiding real estate developers and will hold an important economic policy meeting in July, at which significant policies are typically unveiled or leaked in advance. We provide our analysis on these developments every two weeks on our China of Tomorrow podcast.

Figure 1: MSCI China Index (MXCN)

Data: FactSet, WisdomTree, for the period 12/31/22 to 6/4/24. You cannot invest directly in an index. MSCI China Index = a free float-adjusted,
market capitalization-weighted equity index designed to measure the performance of the Chinese equity market.

Here is how we are thinking about China for various strategies.

Strategic Positioning

Over the long term, China’s returns align with those of other emerging market economies. However, its volatility remains notably higher. Frequent shifts in domestic policies significantly influence the capital market, while foreign investors struggle with how to assess political risk with China’s unique political system.

Sources: FactSet, WisdomTree, as of 6/3/24. You cannot invest directly in an index. Performance data quoted
represents past performance and is no guarantee of future results. Investment return and principal value of
an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than
their original cost. Current performance may be lower or higher than the performance data quoted.

For CXSE’s full standardized and most recent month-end performance, please click here.

Considering China’s still weak recovery from a housing bubble burst and broad U.S. sanctions on Chinese technology and trade, our most active Emerging Market Multifactor Fund (EMMF) maintains approximately 10% exposure to China. This allocation is non-trivial but falls below the typical weight in the MSCI Emerging Market Index (26.7%). The goal is to do better Chinese stock selection to compensate for the lower China weight.

Tactical Positioning

For investors seeking a tactical play, China currently rides a price momentum trend. Policies will be leaked to entice investors leading up to the crucial economic policy meeting in July. The effectiveness of these policies will determine the trend’s continuation.

Notably, some current policies—such as local governments purchasing excess housing units—often have less impact than hoped. Investors often overestimate the effectiveness of such policy announcements.

We offer a range of strategies that allow investors to adjust their exposure to China based on risk tolerance. Additionally, there’s an ongoing debate about whether ex-state-owned Chinese companies remain a better bet. While state-owned monopolies can boost short-term profitability, China’s ex-state-owned businesses tend to perform better over the long run. If China aims to compete successfully with the U.S. in technology and trade, it knows it must leverage these ex-state-owned entities.

Conclusion

In summary, with weak consumer and local government balance sheets, China also faces broad and relentless U.S. sanctions. Our strategic baseline view acknowledges these challenges. However, China’s cyclical and tactical trends could persist, depending on the effectiveness of announced policies, as the central government appears slightly more willing to stimulate the economy using its balance sheet now than in 2023.

Sources: FactSet, WisdomTree, as of 6/3/24. You cannot invest directly in an index. Performance data quoted
represents past performance and is no guarantee of future results. Investment return and principal value of
an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than
their original cost. Current performance may be lower or higher than the performance data quoted.

For full standardized and most recent month-end performance, please click the respective ticker: CXSE, DGRE, DEM, EMMF, XSOE.