We believe the recent comments by Chinese Vice Premier Liu He are indeed a positive inflection point for Chinese technology shares. Certainly, recent share price action seems to confirm this. At the time of writing, over the last seven trading sessions, the Nasdaq Golden Dragon Chinese Index is up 49%. Admittedly the base was exceptionally low as the Index had fallen 37% over a fortnight. But the point is well illustrated nonetheless.

So how has the Chinese investment landscape changed?

Chinese Vice Premier Liu He made a speech addressing multiple investor concerns. Liu He is a close confidant and trusted advisor to Xi Jinping so his comments are taken seriously. The most noteworthy points for investors can be summarised as follows:

• Economy – “Concrete actions must be taken to bolster the economy.”
• US Audit Concerns – “Chinese and US regulatory bodies have maintained good communication and made progress. The two sides are working on a concrete cooperation plan.”
• VIE Structures – “Will support various enterprises to seek listings in overseas markets.”
• Regulatory Crackdown – “Complete the rectification work on large platform companies as soon as possible through standard, transparent, and predictable regulation.”
• Regulatory Environment – “Relevant authorities should actively introduce market-friendly policies and prudently introduce policies with a contractionary effect.”
• Real Estate – “Study and suggest effective risk prevention and mitigation solutions and put forward supporting measures for the transformation to a new development approach.”

We have closely been following China for over a decade and it is rare to see this level of commitment and communication from a senior official on current events. In another fascinating development, we saw followup comments from the China Securities Regulatory Commission, the People’s Bank of China, China’s Central Bank, and the Ministry of Commerce, all issuing statements supporting what was said by Vice Premier Liu He. While words mean nothing without action we are encouraged by this level of comprehensive support and look forward to monitoring the implementation phase.

Our investors are well aware of how our positioning in Chinese equities has detracted from our performance and we believe the events of the 16th March may have created a floor for Chinese equities.

The improvement in the political/regulatory environment coupled with an economy at a trough point and the extremely low valuation levels bodes exceptionally well for long-term returns for investors. We have invested client’s funds into businesses where the core operating businesses are trading on imputed P/E multiples ranging from -5x to +12x. It is extremely rare to find valuations this cheap. In fact, we can only recall two such other occasions, South African shares in 2003 and US shares in 2010. Both occasions were start of a significant bull run.

We are remined of the July 2012 words spoken by then ECB President Mario Draghi that he would do “Whatever it takes” to resolve the Euro crisis. These words marked the turnaround of the euro crisis.

Lui We’s speech may well turn out to be one of the more significant Chinese economic inflection points.

Qui vivra verra – Time will tell.