State Ownership Offered Ballast to Chinese Equities

Amid the turbulence in the Chinese equity market after the U.S. imposed new tariffs on Chinese imports earlier this month, one characteristic was a steadying force: the degree of Chinese state ownership.

The market’s initial reaction to the tariff shock, measured by the performance of the MSCI China Index, was to drop 15% from April 3 to April 7, but by April 25, the index was up 11% from its April 7 low. Chinese companies with higher exposure to state ownership and/or lower exposure to U.S. revenue sources proved more resilient over these chaotic days.

SOE exposure helped tame the bear

From April 3 to April 25, the best-performing factor in the Chinese equity market, according to the MSCI China Local Equity Factor Model, was the state-owned enterprise (SOE) factor, a distinctive factor in the China market. Although heavily state-influenced companies may lag in bull markets, in times of stress they are likely to receive policy support and directives intended to shore up confidence.

Location, location, location — less US exposure, greater odds of resilience

Our analysis of the economic exposure of Chinese industries shows that those with high U.S. revenue exposure — such as pharmaceuticals and biotech, tech hardware and autos — suffered steep losses, while defensive industries that depended less on U.S.-source revenues — including food, beverage and tobacco, telecom and utilities — had smaller declines.

In addition to an industry’s or company’s revenue-exposure distribution and level of state policy support, the geographic location of its assets could be a useful indicator of potential tariff-related impacts.