China stocks: 'A tale of two markets'

Leslie Shaffer | Writer for
Don't lose sight of big picture on China: HSBC

China's stock market may have spiraled downward for years, but "new economy" shares have actually surged, creating opportunities in more traditional sectors, HSBC's chief investment officer for Asia-Pacific told CNBC.

"It's been a tale of two markets," HSBC's Bill Maldonado said.

"We've had a big flurry in the new economy stocks," he said, citing outsized gains in some shares of clean technology, green energy and solar companies.

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For example, the Hong Kong-listed shares of wind-farm operator China Longyuan Power surged over 85 percent in 2013, although it's shed a bit more than 12 percent so far this year. Likewise, GCL-Poly Energy, a producer of solar-grade polysilicon and an operator of co-generation plants, saw its Hong Kong-listed shares climb more than 60 percent in 2013 before tacking on nearly 9 percent so far this year.

At the same time, the has shed nearly 6 percent since the beginning of 2013.

Qilai Shen | Bloomberg | Getty Images

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Since the beginning of this year, around $6.48 billion has flowed out of China equity funds, with another $1.48 billion leaving Hong Kong funds, according to data from Jefferies.

"The traditional economy stocks -- the industrials, the banks -- all of that kind of stuff has been left behind and that's created a lot of opportunities in the market," Maldonado said, adding these are "stocks that are cheap and very profitable. And you don't normally get to say those two things at the same time."

The selloff has left the MSCI China index trading at around 8.8 times 12-month forward earnings, a near 27 percent discount to its long-term average of 12 times, according to data from Nomura.

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Among the traditional economy sectors, banks are trading at 4.7 times earnings, a more than 50 percent discount to long-term averages, while property shares are at 6 times, a more than 40 percent discount, the data show.

To be sure, not everyone sees the valuations as a buy signal.

"It's cheaper, for sure. But there's a reason to be cheap," said Ha Jiming, vice chairman for Goldman Sachs private wealth management in China.

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"People are concerned about the credit quality. People are concerned about the future movement of housing prices," he said, noting property transaction volume and sometimes prices have been declining in some cities. "There are cases of defaults (on) trust products (and) corporate bonds. So people are concerned about the quality of the bank loans. That's why we're seeing this low valuation."

But Maldonado believes this concern over China's banks is overdone.

"We know that there's a credit issue. We know roughly where that credit is - it's in the local government financing vehicles, it's in the SOEs (state-owned enterprises)," he said. "There are some great opportunities in the financial sector now. (It's) so cheap and so profitable at this point. It's very attractive."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1