A few days after the stock market rout in China's mainland market, wealth managers reflect on how much real damage has been done and what the future holds.

Recent moves by Chinese authorities to ban short-sellers of equities, boost liquidity and prevent a further sharp fall in its mainland A-shares market haven’t endeared the country to international investors. It has certainly reduced some of the optimism that may have attended the launch last November of the Hong Kong/Shanghai Stock Connect equity market link. Returns on the MSCI China Index are 7.46 per cent this year so far (capital plus reinvested dividends), according to data, in dollar terms, from Morgan Stanley Capital International. For the latest month, that index is down 6.27 per cent. Investors have had a nasty ride; but should there be wider concerns?

A number of wealth managers give their views. Here is a selection.

Jade Fu, investment manager, Heartwood Investment Management
Despite the significant market fall since early June, the onshore market is more than 50 per cent higher from the announcement of that programme and 100 per cent higher from the cycle low of March 2014.  

Many investors are justifiably questioning the tactics of the Chinese government’s intervention into the onshore equity market. We acknowledge that some policy actions are concerning; specifically, the ban on major shareholders to liquidate stocks and the pressure on private investment banks and fund managers to buy the market. Other steps to curb margin trading and to inject liquidity were probably necessary. Arguably, the purchasing of the stock market on the part of the central bank, sovereign wealth funds and state pension funds is not so dissimilar to programmes that have been followed in other major developed economies.

In spite of events, we have not changed our positive long-term investment view on China. While the authorities are facing new challenges as the market infrastructure matures, we believe that they have strong tools to manage the real economy; for example, there is plenty of room to cut interest rates. We expect the government to also remain supportive of the stock market not only in the context of boosting the real economy, but to provide another investment option to individual investors away from traditional destinations, such as property, which are not compelling.

China’s economic fundamentals remain weak but have shown signs of stabilisation over the past two months. Manufacturing surveys have settled since March, retail sales growth is seeing a faster rate of expansion on a year-on-year basis, and industrial production has been picking up. The area of the economy which has seen significant contraction is fixed asset investment growth, mainly due to overcapacity issues in property and certain areas of manufacturing. However, this is a necessary adjustment as China transitions to a more sustainable growth model. We are not in the "hard landing" camp, but rather consider China as a structural slowdown story.

Within our emerging market allocation, our overweight exposure to China is predominantly through the offshore market, Hong Kong, with the A-share domestic equity market a small component. We are invested in active managers who have a demonstrated ability to navigate uncertain and challenging market environment as the structural slowdown story plays out. Market volatility has dampened over the last few trading sessions. Equity valuations are starting to look interesting in the offshore market, which trades at a discount to the A-share market and is underpinned by a largely institutional investor base.

Nomura
With the A- and H-share markets rebounding strongly on Thursday and Friday (9–10 July), we believe the most panicky period in Chinese equities in 2015 is likely behind us. But for both indices to revisit their annual highs and to make new highs, we need further consolidation through mid-August’s interim reporting period and high frequency macro data. Top down, the high 3,000 on the CSI300 is a level where level of margin financing can be reduced without triggering massive liquidation, an exercise much desired by Beijing, in our view. Furthermore, interim results and high frequency macro data will help clarify micro- and macro-level visibility in 2H15F [the second half of the 2015 financial year] for data-focused offshore investors.

While many offshore investors were concerned over reduced liquidity due to large-scale trading halt among A-shares, the overall financial system is stable, as the key-tenor interbank repo and SHIBOR rates trended down from recent quarter-end peaks in late-June. Indeed, the financial system should be on much safer ground compared to the SHIBOR spike in June 2013. Nomura’s China economics team, led by Yang Zhao, argue that while the A-share selloff poses a small negative risk to the real economy, it should have a limited impact on Chinese consumption. But because there was a lot of borrowed money, and many first time equity owners, the loss of principal in what is a normal market correction became emotionally magnified, in our view.

In our view, mainland investors and regulators are undergoing some collective learning, which ultimately will make both more seasoned. If the June 2013 SHIBOR spike taught regulators the importance of providing to the capital market, transparency, clear communication, and stable interbank liquidity, the lessons are margin financing is a double edged sword and that cash and futures are closely linked markets. As China further opens up its capital market, we see more lessons to learn and loopholes to fix.

Should there be further moments of near crisis, we would take them as buying opportunities, rather than the end of world for China. Regarding the MSCI inclusion of A-shares, we have never seen it as a short term catalyst to share prices, but rather as a medium term consideration for building onshore capability for interested entities as the A-share market is the second largest capital market in the world by market cap and trading volume.

BNY Mellon Wealth Management
Our focus remains on the impact of the slowing Chinese economy on global growth, rather than the volatile trading of local China A-shares. Given our outlook for a sustained global recovery, we remain confident that our current portfolio recommendations are well positioned for the choppiness that comes with a late-stage bull market. Our slight underweight to emerging markets has been advantageous in protecting our clients against a weakening Chinese economy. 

We are also positioned to take advantage of opportunities presented by this pullback. Our investment boutiques, who manage many of our international strategies, are finding opportunities through their bottom-up research in sectors such as health care, information technology and consumer stocks. We are carefully monitoring market volatility, local and regional confidence in China as well as other global developments. We will continue to keep you informed of any market developments or changes in our positioning.

Barclays
There are a few reasons why investors might fear that the downdraft in Chinese equities spells trouble for China’s economy. The most plausible, in our view, is that it may have negative wealth effects on household spending. However, we think any effects are likely to be much smaller than might be suggested by headline estimates of the decline in equity market wealth. This is because it is highly unlikely that consumer spending had adjusted to anywhere near the peak stock market valuations of mid-2015.