Chua’s Asia Genesis Asset Management Pte told investors this week the $330 million fund would close after it was badly burned by wrong-way bets on Japan, and by falling Chinese markets that he largely blamed on inaction by policy makers, including President Xi Jinping.
“I am writing to you with a heavy heart and utmost regret,” Chua said in a letter to clients saying their cash would be returned after an almost 19% plunge this month. “My confidence as a trader is lost.”
Chua’s plight shows how even the most experienced fund managers have been ensnared by a China market meltdown exacerbated by Beijing’s limited policy support. Li Bei, a long-time China hedge fund bull, admitted to mistakes after suffering the worst losses of her career, while global investment firm T. Rowe Price Group Inc. has seen the value of its China holdings fall by 80% over years from its peak.
“All the evidence I’m seeing is that the economic data is a lot weaker than I thought, than anyone thought,” said Justin Thomson, head of international equity at Baltimore-based T. Rowe Price. “You have had your confidence tested harder and for longer than before.”
China’s benchmark CSI 300 Index hit a five-year low on Monday and the prolonged slump has pushed mutual fund closures to a five-year high, in another sign of waning investor confidence. Though the latest $278 billion rescue package lifted shares briefly Tuesday, many remain skeptical it’s enough to end the rout.
China’s market is facing “a serious lack of confidence” with some investors worrying about the possibility of a recession, according to Shanghai Yunhan Asset Management Co. President Zhang Wenchao, whose fund manages about 700 million yuan ($98 million). When Zhang tried to buy the dip last week, he was quickly forced to sell to cut his losses. He’s since dumped all stock holdings.
“It was so scary — don’t bottom fish,” Zhang said, adding that investors’ hope now hinges on policy support rather than fundamentals or sentiment. “Stock valuations certainly look good at current levels, but we may not be at the real bottom yet.”
Even one of China’s best-performing macro hedge funds has struggled. Shanghai Banxia Investment Management Center’s Li, who manages more than 10 billion yuan predicted a bull market in October 2022, betting on a rebound in corporate profits and the property sector.
Last year her flagship fund plunged almost 15% – the first annual loss in at least six years, according to the firm’s December investor letter seen by Bloomberg. The maximum drawdown, or decline, was 25% from its peak in the middle of 2023, the worst drop in her career.
“I did make the mistake of assuming a quick victory,” Li said in a post on WeChat Tuesday. She added that the intensity of China’s policy response to its faltering economy failed to meet her expectations.
In all, more than $6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021.
Meanwhile, Kamet Capital Partners Pte’s Chief Executive Officer Kerry Goh, who still considers himself a long-term China bull, has reduced his China weighting after steep market losses last year.
“We were wrong on the momentum last year,” he said, adding that its equity allocation to China has fallen to 20%, from more than 30% in the first quarter of 2023. He notes that long-only funds sold billions of dollars of Chinese stocks last year and they continue to sell.
For investors like Luca Castoldi at Reyl Intesa Sanpaolo in Singapore, fundamental analysis is becoming less effective with so much pessimism and doubts about government support. Investors don’t care about China anymore, and those that don’t have to invest there have already pulled out, he said.
“I cannot use the same metrics that we used before,” said Castoldi, who is now trading more on technical indicators and recently turned neutral on China stocks from underweight. “You never know where is the floor.”
Few money managers have offered up as frank a mea-culpa though as Chua, a veteran of Salomon Brothers and Bankers Trust and a former investment officer at the Monetary Authority of Singapore.
The recent rough trading “has proven that my past experience is no longer valid and instead, is working against me,” Chua wrote in his letter to investors. “I have lost my knowledge, trading and psychological edge.”
It was a remarkable pivot for Chua, who as recently as last month was extolling the virtues of China via his LinkedIn posts, while decrying the “fake narratives” of the country’s critics and the Western media. Toward the end of December, Chua and his team remained true believers, convinced that Hong Kong and Chinese equities were nearing the bottom while Japanese stocks had rallied to a peak.
Chinese and Hong Kong stocks represent “the best risk reward stock investing set-up in my 40-year professional career – I am super bullish,” he posted. “The Chinese are capable, flexible, great businessmen and executors.”
To back that view, his Asia Genesis fund increased leverage to add more China stocks while shorting Japanese equities, according to the firm’s letter to investors on Monday. As Japanese assets continued to soar, the firm closed off its short calls on Jan. 16 and focused on bets that Hong Kong and China stocks would recover once the People’s Bank of China cut interest rates.
“Alas, the PBOC did not cut rates and President Xi’s speech the day after indicated to equity investors that his focus was not on the markets,” Chua said in the letter. By Jan. 18, the fund had lost 6% in a single week. “I still do not understand the inconsistency of China policy makers not fighting against deflation,” Chua added.
Meanwhile, Japanese stocks remain on a tear, rising to a 34-year high this month as authorities and the stock exchange urge companies to boost shareholder value and enhance corporate governance.
“The principle of risk-reward for both the short-term and long-term has turned its head,” Chua wrote. “We made big mistakes in the recent sharp Nikkei and Hong Kong moves which went in opposite directions.”
Not giving up
Still, some China bulls aren’t giving up just yet.
Though T. Rowe Price’s China holdings have dropped to $15 billion from a peak of $75 billion, Thomson still backs China as an asset class, even after the protracted three-year decline. He thinks the sentiment is so extreme, the market could snap back quickly.
“Deep down, I still believe that there is a lot of money to be made in China,” he said. “But the period of China’s hyper growth is done. It will be a different China.”
Banxia’s Li meanwhile, who’s been calling China a “once-in-20-year” opportunity, now says it may take a few more months or quarters to materialize.
“I always believe that I will achieve good investment performance in the long term,” and will be “one of the best” investors in China, she wrote in her note. “I will use the next few decades to prove this.”