- Kelvin Tay of UBS Global Wealth Management warns Chinese markets could see further losses from here.
- He said institutional funds are currently reassessing risks and will likely take a few weeks to decide whether they want to liquidate or accumulate more in Chinese stocks.
- Tay said he thinks funds will likely "sway towards the liquidating side."
Investors looking for bargains in the Chinese market should beware as stocks there could see further losses, warns UBS Global Wealth Management's Kelvin Tay.
"I think there's actually more room for this to actually run," Tay, regional chief investment officer at the firm, told CNBC's "Squawk Box Asia" on Wednesday. "I certainly don't think this is the bottom."
Following a rout that started late last week and accelerated as the Hang Seng index in Hong Kong plunged more than 8% in just two days, China's markets are now among the worst-performing in Asia-Pacific year to date.
Tay said many institutional funds are currently reassessing risks as Chinese regulations target industries such as technology and private education. He explained the process is likely to take a few weeks before funds come to a final decision on whether they should liquidate or accumulate more stocks in the Chinese markets.
"I think the decision is probably going to sway towards the liquidating side," Tay warned. "I don't think this is actually time to bottom fish."
Tay said Beijing's regulatory crackdown coincides with a "window of opportunity" as the global economy bounces back from the pandemic.
"Economic growth this year is not disputed because you have the U.S. growing at 7%, you have the eurozone recovering at 4.3%, that in turn is likely to pull the Chinese economy along with it as well," he said.
Furthermore, the Politburo meeting next year in October will coincide with the end of Chinese President Xi Jinping's second five-year term — a "very, very important event" for the country.
Outlook for Chinese regulation
Looking ahead, Tay predicted that three potential catalysts could end the current uncertain regulatory outlook in China.
"I think the first indication should come sometime this week or next from the July Politburo meeting," he said, adding that the event will be "closely scrutinized by investors" for clues on regulation.
The next potential catalyst is if the Chinese economy sees a major slowdown, a scenario he described as "very unlikely."
"Ironically, if the economy slows down dramatically from here, then they are likely to take a step backwards because you can't afford to actually tighten things on a regulatory basis … and not risk the economy tilting over," Tay explained.
The last catalyst, which Tay said was the "least probable" among the three, is if U.S.-China relations see a "dramatic improvement" overnight.
"That will also result in sentiment actually becoming better," he said.
The relationship between Washington and Beijing remains tense. China's vice foreign minister recently said the economic giants are "now in a stalemate."