For China Stock Investors, 2015 Has Been: Two Steps Forward, One Back

30 Jun 2015 | Author: | No comments yet »

Emerging Stocks Gain Led by China as Currencies Trim June Drop.

Chinese stocks rallied late to close sharply higher on Tuesday, after early losses were wiped out by the central bank’s 50 billion yuan cash injection and the state pension fund announcing it would possibly pump up to 1 trillion yuan into equity investments.The next shoe to drop on the A-share market roller coaster could be roughly 300 billion yuan worth of leveraged positions that could rapidly unwind, according to calculations by HSBC. “Margin financing was the primary market driver on the way up, and it will be a key driver on the way down as well,” HSBC equity strategists led by Steven Sun said in a research note on Monday.SHANGHAI—The silver-haired retirees who congregate in a dimly lit brokerage in the old French Concession here can expertly split a trading screen into six windows, interpret a candlestick chart and reel off stock ticker symbols from memory.”The thing about China is that the authorities spend a lot of time managing mini-cycles around what is probably a secularly and structurally slowing economy,” BlackRock’s head of fixed income in Australia, Steve Miller says. “There seems to be an inordinate amount of faith in the ability of the authorities to manage any slowdown.

Whilst the authorities have done a really good job, I worry about the complacency about their ability to do a good job in perpetuity. “When that happens the ramifications might be big. The expanded version of monetary stimulus came on the heels of the weekend announcement where the central bank cut interest rates for the fourth time in seven months and lowered deposit reserve ratios for some banks, part of measures by Beijing to shore up the slowing economy. But one thing they all know—or think they know—is that Beijing controls the overall direction of the market. “If the government wants the market to go up, it’ll go up,” says Feng Zhaoyuan, a 66-year-old day-trader who hangs out at the Shanghai Securities Co. trading hall. “This is a market with Chinese characteristics.” Such attitudes are commonplace across China, and they’ve helped to boost the valuation of the combined Shanghai and Shenzhen stock exchanges to more than 100% of national GDP from about one-third less than a year ago. The Shenzhen Composite index added 4.8 per cent, or 112.823 points, to close at 2464.226, while the ChiNext board rallied 6.28 per cent, or 168.846 points, to finish at 2858.606, after dropping more than 7 per cent at one stage in the morning. China is considering steps to stabilize stocks, the Economic Observer reported, while the finance ministry said it will allow the pension fund to invest in shares.

Almost a quarter of a century after Shanghai revived its stock exchange in the ballroom of the former Astor House hotel, the country’s $10 trillion-plus market has grown into the world’s second largest after Wall Street. These would be real, global economic ramifications.” Stocks are the new apartments in China, and it was a clampdown on property investing that came with a bold anti-corruption drive that pushed investors and speculators into the sharemarket. As of the close on Monday, the Shanghai Composite, Shenzhen Composite and ChiNext Price indices were all in bear market territory, with Shenzhen down 25.1 per cent since June 12 and ChiNext down 32.4 per cent since June 3.

Half of those positions might have been liquidated last week following a correction which has dragged Chinese markets into bear territory since the peak of June 12. If they’ve borrowed too much, monetary stimulus such as the weekend cuts in interest rates and bank reserve ratios announced by Beijing will not stop investors from having to further liquidate their positions. Ghadir Abu Leil-Cooper, head of EMER at Barings asset management, said: “As is clear from the reaction of markets today, the consensus view on Friday was that the situation was likely to be resolved in a way which would allow Greece to continue to receive funding from the Eurozone.” The Hang Seng is up 11.40 per cent in the first half of 2015. Indeed, it’s possible that hope will, once more, triumph over experience among the country’s legion of small traders and that optimistic sentiment will send the markets climbing again for a while. Gerry Alfonso, a sales trader at Shenyin & Wanguo in Shanghai, said more volatility is likely to come as Beijing tries to take some pressure off the country’s equity markets, which tend to pay more attention to Chinese government policies or liquidity levels because of the abundance of retail investors.

A semi-annual audit of listed firms, including banks and brokerage houses, meant companies who trade the markets had had to dump stocks to return cash to their balance sheets, compounding the overall sell-off, said Anne Stevenson-Yang, founder of J Capital Research. Feng still reckons that the Shanghai index—which briefly dropped around 5% to below the critical 4,000-point mark on Tuesday before reviving and ultimately ending 5.5% higher—will end the year at around 5,500.

Both actions are stimulatory and credit-friendly, which suggests that debt levels and a proliferation of margin lending is not the biggest concern among Chinese officials. The short history of the Chinese bourses has been marked by the successive efforts of financial authorities to take advantage of the faith of small-time investors in the Communist Party to engineer and sustain spectacular rallies.

It is a familiar one for China followers: growth. “With equity markets having fallen as sharply and as quickly as they have, and with officials then implementing RRR cuts, it leads you to believe they are more concerned with a drop-off in growth than with leverage,” TD securities Singapore-based rates strategist Prashant Newnaha says. “With a crisis, you usually see some real sharp moves across asset classes, you end up seeing risk assets fall quite sharply as well,” he says, citing foreign exchange markets and options by way of example. “We haven’t seen that. It said it may consider investing up to 30 per cent of its net assets in equity investments, potentially pumping billions into the country’s sputtering stock markets. “The pension fund aims to emphasise the importance of investment, moving away from the traditional way of putting money in our saving accounts,” said Zheng Bingwen, an official at the China Academy of Social Sciences, a leading think tank of the State Council. These ultimately collapse, wiping out the savings of millions of ordinary individuals who hoped they’d be able to bail out with their profits before the end arrived. The Nikkei 225 index rose 23.05 points to 20,133 by the midday break, having fallen 2.88 per cent on Monday, but the Topix index slipped 0.17 percent, or 2.80 points, to 1,622.02.

The latest rally was given a boost by a trading link inaugurated in November last year that opened up Shanghai’s stock market to overseas investors, a move that local punters interpreted as a vote of international confidence in the outlook for Chinese stocks. The government is considering a delay in the IPO of China Nuclear Engineering Corp. because of market conditions, according to people with knowledge of the matter, who asked not to be identified because the information is private. The markets soared even though the pace of China’s economic expansion has markedly slowed and the growth of corporate revenues and profits is at a complete standstill. Much like Greece’s own debt woes, the shadow banking sector in China has bubbled away as a known risk for years, but without posing a genuine problem for markets. Credit Suisse strategist Damien Boey says that the rally in A-shares “has very little to do with fundamentals” because the last couple of quarters of nominal gross domestic product growth in China have been flat or negative. “You’ve had an incredible number of people decide it’s a good idea, based on their version of events, to go [and] take out loans and invest in Chinese stocks,” Boey says. “Now there is tremendous leverage.” While this might not represent a destabilising event, it is definitely a deleveraging event.

Greece is staggering deeper into the economic unknown, saying it will miss a payment to the International Monetary Fund today and leaving the protection of Europe’s bailout regime at midnight. The economist Jonathan Anderson of the Emerging Advisors Group writes that, contrary to popular belief “the Chinese government has spent most of the last 15 years trying helplessly to prop up a falling market.” This time around, they hoped that a bull run would allow heavily indebted state companies to switch expensive bank loans for free financing in the form of IPOs and rights issues. This would enable them to better compete in China’s “new normal”: a slower-growth, service-driven economy with a shrinking role for state-driven investment. Most Brazilian stocks gained as gains in electronic-payment processor Cielo SA jumped 2 percent, outweighing declines in raw-material producers including Vale SA, which slid 3.3 percent.

Underpinning what could have been a multiyear bull run in equities is a narrative that stands on its own merits: the effort by President Xi Jinping to reform laggard state enterprises, partly by opening up closed service-sector areas such as banking and telecommunications to private competition. The retirees who lose their savings don’t have much political clout, so there’s little prospect they’ll threaten the regime no matter how disgruntled. Only Shanghai is linked to the relatively new Shanghai-Hong Kong Stock Connect pipeline that joins mainland China to foreign investors trading in Hong Kong. About a month ago, MSCI weighed up whether to include A-shares in its regional benchmark indices, which would have the effect of forcing index-replicating funds to buy Chinese stocks. There will be “further weakness” next quarter in part due to foreign-currency bond maturities, Yury Tulinov, the head of research at PAO Rosbank in Moscow, said by e-mail.

But MSCI decided not to proceed as part of its annual index rebalance, saying it was open to the idea but accessibility needed to be improved for foreign investment. After great anticipation, Chinese stocks shook off the announcement with a fraction of a per cent drop, reinforcing the view that Chinese equities do their own thing.

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