· China
and US regulators announced last Friday that they signed a Statement of
Protocol that would allow US regulators to inspect the audit papers of
US-listed Chinese companies.
· The
US regulators can now conduct on-site inspection which is likely to start in
mid-September and conclude by December. While there is still uncertainty
regarding the details of inspection such as the different interpretations from
both sides’ regulators as well as the final inspection results, the audit
agreement is at least a major step forward to alleviate the China ADR delisting
risk.
· Global
asset allocators have been underweight China equities amid the overhang of the
audit dispute. For example, global institutional investors’ holdings of the Top
30 China ADRs is the lowest in 3 years. The deal provides a long-awaited
catalyst for investors to increase China exposure (or cover their short
positions), especially on the ADRs and Hong Kong-listed tech names, which are
at very depressed valuation levels.
· With
the reduction of the tail risk of delisting, coupled with the recently
announced rate cuts and RMB 1 trillion (USD 145bn) stimulus, we could see
relative outperformance of China shares in the short term when the US market is
adjusting to a hawkish Jackson Hole speech from Fed Chair Powell.
· Further
upside potential of China market still hinges on the volatility of the global
market and the Mainland’s growth outlook which for now remains sluggish. We
believe (1) further post-covid re-opening, (2) increasing easing support, (3)
signs of stabilization in the property market, and (4) positive progress of the
audit inspection are the key factors for a more sustained outperformance of
China equities.
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