China Hedge Fund Says Stocks Are Near Bottom

(Bloomberg) -- The rout in Chinese stocks may be nearing an end as the central bank turns to more accommodative monetary tools, according to Shanghai Chongyang Investment Management Co., whose flagship hedge fund has returned 356 percent since its launch in September 2008.

“While asset prices will face a ceiling given China's tough regulation, risk prevention and deleveraging, a more flexible policy stance will put a floor under risk asset prices,” said President Wang Qing. “The market clearly is in its bottom range after earlier corrections.”

Chongyang is adding shares of thermal power and electrical equipment firms, consumer and financial companies as well as stocks with high dividend yields and strong cash flows, Wang wrote in emailed answers to questions.

The People's Bank of China cut banks' reserve requirement ratio last month as stocks tumbled amid concern over a trade dispute with the U.S., a weakening economy and a depreciating yuan. The Shanghai Composite Index has fallen 23 percent from its January high to be the worst performing gauges worldwide. Chongyang manages about 20 billion yuan ($3 billion) of mostly long-only A-share funds.

China stocks fell Thursday, with the Shanghai gauge dropping 0.9 percent and closing at its lowest since March 2016. The Shenzhen Composite Index sank 2.2 percent, while the large cap SSE 50 index outperformed, adding 0.3 percent.

Among Wang's other key points:

• Foreign investors are likely to add shares as valuations are near a historical trough, while further downside in risk assets is normally limited when there's adequate money supply, according to Wang
• Some blue chips with relatively smaller market cap are under- or reasonably valued
• ChiNext and small caps with high valuations may drop further amid the tight credit environment; unicorn listings and issuance of Chinese depositary receipts will lead to industry consolidations with less competitive firms being phased out
• The yuan may continue to weaken against the dollar in the near term but depreciation will be modest, Wang says

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Kana Nishizawa, Ron Harui

©2018 Bloomberg L.P.

With assistance from Editorial Board