Goldman Sachs lowers view on China's offshore equity markets

FILE PHOTO: The Goldman Sachs company logo is on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 13, 2021. REUTERS/Brendan McDermid/File Photo

LONDON (Reuters) - Goldman Sachs on Thursday lowered its view of China’s offshore equity markets in the wake of a market rout prompted by Beijing’s sweeping regulatory actions.

The bank cited a disproportionately high index representation by tech and privately owned companies for its adjustment of views on MSCI China to “market-weight” from “overweight”.

Chinese shares recovered some ground on Thursday after a rout this week in the wake of Beijing’s sweeping regulatory actions that hit firms in the $120 billion private tutoring sector and technology behemoths.

Goldman Sachs reiterated its overweight stance on Chinese A shares for their favourable sensitivity to potential fiscal policy easing in the second half of the year, higher index weights in areas where policy support could be strong, and still-robust buying potential.

“Recent regulations have signalled that the Chinese authorities are prioritising social fairness/stability over the capital markets in areas that are deemed public goods or important to strategic policy goals,” Goldman analysts said in a note.

Chinese tech companies or privately owned companies were currently trading on attractive valuations, the bank said.

The bank said the sell-off since February was a major correction, as per its classification of more than 20%, approaching the scale of the pullback of 2018, where local regulation and shadow banking tightening along with U.S.-China trade tensions led to a 33% correction in MSCI China.

“‘Uninvestable’ has featured in many of our recent conversations with clients regarding investing in Chinese stocks but we would be hard-pressed to extrapolate the rather extreme regulations such as non-profit orientation and capital raising restrictions to the whole equity universe,” the analysts said.

Still, the bank said it was premature to call for an inflection point in the equity market’s price and sentiment cycle, with regulation headwinds continuing to dominate investors’ valuation assessment.

Reporting by Tom Arnold; Editing by Jason Neely and Peter Graff