As the Chinese stock market rises, domestic funds investing in Chinese stocks are also attracting capital. This contrasts with the net outflow that continued until the beginning of the year. However, as the Chinese stock market has nearly recovered to pre-COVID-19 levels, forecasts about its future direction are mixed. There are advisories to be cautious regarding valuation.
According to fund evaluation company FnGuide on the 20th, as of the previous day, the total asset value of 197 Chinese stock funds is 7.8723 trillion won. This has increased by 293.9 billion won over the last month. Considering that there was a net outflow of 278.2 billion won from Chinese stock funds as of Jan. 2, the atmosphere has changed.
Among domestic exchange-traded funds (ETFs), the TIGER China Hang Seng Tech has risen to first place in net inflows over the past month, attracting 281.9 billion won. The TIGER China Hang Seng Tech tracks the Hong Kong Hang Seng Tech Index.
As the Chinese stock market continues to trend upward, capital is pouring in. The revenue from Chinese stock funds has increased by 12.19% compared to the beginning of the year, significantly outpacing the average revenue of overseas equity funds (-5.03%) during the same period.
The Chinese stock market has significantly declined due to the impact of the economic downturn following COVID-19. However, with the launch of cost-effective artificial intelligence (AI) applications by Chinese startup DeepSeek in January, stock prices are on the rise, particularly for major tech firms like Tencent, Alibaba, Xiaomi, BYD, and Meituan.
The Chinese government has also initiated monetary easing to boost domestic demand. A representative policy is the 'trade-in program,' which provides subsidies for purchasing electronics by supporting part of the sale price. The Chinese government plans to increase the scale of the trade-in support from 150 billion yuan last year to 300 billion yuan (approximately 60 trillion won) this year. Thanks to the stimulus measures, China's 12-month forward earnings per share (EPS) forecast has been revised upward by 3.2 percentage points compared to the beginning of the year.
The key question is whether the recent upward trend will be sustained. The U.S. administration under Donald Trump is tightening tariffs on China. Contrary to optimistic forecasts that tariff policies will be used as a 'bargaining chip,' if U.S.-China tensions worsen, it could weigh on the stock market.
The pace of recovery in domestic demand is slower than expected. The growth rate of disposable income for Chinese citizens is 4.6%, which is below the real GDP growth rate (5.0%), and household deposits remain at a high level. This indicates that wallets are still not opening.
Above all, it has become difficult to assert that the Chinese stock market is cheap. According to Choi Seol-hwa from MERITZ Securities, the 12-month forward price-to-earnings ratio (PER) of the Morgan Stanley Capital International (MSCI) China Index is at the level of 11.5 times, recovering to 95% of the levels seen just before the COVID-19 outbreak in early 2020 and just before the Shanghai lockdown in early 2022.
In particular, the PER of the hardware sector among Chinese tech stocks is at 55 times, which is overvalued compared to 33 times for the same sector in the U.S. Choi noted, "It is still too early to discuss overheating in the Chinese stock market and we expect further increases," while adding, "There are overvalued stocks like those in the hardware sector, so selection and focus are necessary.
Choi noted that the software sector is viewed more positively, and that the MSCI China Index, Hang Seng Tech Index, and STAR Market 50 Index, which have a relatively high weighting in the software sector, are more attractive for investment.