Quality growth is more important than short-term volatility


In a recent exclusive interview with Hong Kong Economic Times, Value Partners’ Co-Chairman and Co-Chief Investment Officer Dato’ Seri Cheah Cheng Hye shared his insights on the recent regulatory moves in China, which resulted in volatility in markets. Below is a summary of the takeaways from the interview.

Recent policy updates in China have made foreign investors reckon the stark differences between the development models of China and the West and I expect it may take two to four months for the markets to stabilize. Investors should not just focus on the short-term market volatility, but instead, look at the longer-term implications.

Quality and sustainable growth more important in the long-term than short-term market volatility

Last month, the government introduced regulatory changes in the private after school tutoring (AST) sector, which include requiring them to be registered as non-profits. This has triggered a significant market sell-off.

The Chinese government is now taking a longer-term view and focusing on quality and sustainable economic growth. They are trying to take further action to strengthen the livelihood conditions of the Chinese middle class, of which their biggest worries are housing, education and healthcare – all of which have become increasingly unaffordable. The government had introduced measures to specifically address these problems, which in the longer term are more important than the temporary setback in the stock markets.

China is changing from a model of what I call “extreme capitalism” to a more “socially responsible capitalism”, which tries to look after all stakeholders, including shareholders, employees and the whole society. This will create a growth development path for China that is more sustainable, more self-reliant, and reduce any social tensions to have a more stable society.

Stock market adjustments in the short run are acceptable, but I expect the Chinese regulators to enhance communication with the market, so that investors do not get misguided or panic over new policy rollouts in the future.

Continued volatility expected in next 2-4 months. The market is now for long-term investors

The Chinese investment story continues to be very attractive. China was the first to come out of COVID-19 and its GDP growth is still projected to reach at high a single-digit this year. The country did not engage in excessive money printing and maintains stable and prudent monetary and fiscal policies. Fundamentals remain attractive and in my view is a window of opportunity for regulators to introduce reform to achieve their long-term goals.

The outlook for Chinese stocks in the near term will continue to be volatile. Some might not agree with the above as their confidence in China might have been negatively affected, so they will continue to sell, which will result in volatile trading conditions. But for those who are willing to take a long-term view like me, I am still long on China.

China is too big to be ignored. At the moment, 30% of global economic growth comes from China, while 20% is from the U.S. Together, these two countries are contributing half of the total economic growth of the entire world. The current valuation of Chinese stocks is at about 14.5x on a PE basis. Recalling the A-share market crash in 2015, the average PE dropped to 10x-12x but recovered one year later. This kind of drop is not expected this time, and even though there could be further downward pressure on the market, we should not be far from the bottom. Also, I would also expect the Chinese government to step in to attract capital inflows and stabilize the market very soon.

I believe this is now a good time to gradually build up exposure for China’s long-term story. Foreign ownership in China’s A-share market is still low and this is expected to continue to rise. I favor names that continue to ride on the structural growth cycle, including clean energy, automation and technological upgrade. Despite expected market volatility in China in the coming months, I believe long-term investors can still find opportunities in the country’s financial markets.


The article was published on the front page of the Hong Kong Economic Times, an authoritative financial media in Hong Kong, on August 2, 2021.


The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable as of the date of presentation, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.