Bloomberg: U.S. Dot-Com Bubble Was Nothing Compared to Today’s China Prices

I suggest taking statistics with a pinch of salt. Everybody can generate a different number to justify their case depending on how they slice and dice the data. The shanghai PE and Hong Kong PE may be biased towards the banks and property companies which have low PEs now due to their widely known problems. And I can't seem to get such a PE for shanghai no matter how I slice and dice, maybe something wrong with my chopping board..

(27-04-2015, 02:09 PM)grubb Wrote: The shanghai PE and Hong Kong PE may be biased towards the banks and property companies which have low PEs now due to their widely known problems.

Valid point about banks which is a large constituent of MSCI China but even ICBC is up 20% in April alone.

But the biggest constituent in MSCI China with PE 11X is Tencent at 10% weight and PE of 40X this year

https://www.msci.com/resources/factsheet...-index.pdf

That said IMHO I think there should be some significant "Sell in May" effect in China as authorities tries to taper the market bullishness. Which authority in the world do you know of that tries to tame a <1 year old bull market?

(Bloomberg) -- China’s securities regulator started a
campaign to crack down on stock-market manipulation and insider
trading, the latest effort to reduce risks as an equities boom
lures a record number of novice investors.
The China Securities Regulatory Commission will target
trading by brokerage employees using non-public information, and
market manipulation, including of futures prices, the CSRC said
in a Friday statement on its website. The regulator also cited
insider trading in over-the-counter markets and accounting fraud
in mergers and acquisitions.
The CSRC has rolled out measures this year that signal an
effort to temper gains for the world’s best-performing market
and prevent another boom-and-bust cycle. This month, authorities
banned a source of financing for margin trades, while CSRC
Chairman Xiao Gang said new investors should be cautious and
evaluate stock market risks. In January, the regulator announced
a round of checks into margin lending by brokerages.

http://www.bloomberg.com/news/articles/2...rket-soars

Feeding the boom -- Chinese investors opened 3.26 million accounts last week

China’s Stock Market Boom Sees Shanghai Exchange Grow Too Big For Its Own Computers


SSE went up 3% again today.

Given that before GFC it did hit 6000+points before crashing, there will probably be more space to run, but not for much longer if it continues to up 2-3% a day, it will hit above 6000+ points again. Global and local economic conditions are not in tandem either.

Too hot to touch, better dun touch

"“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” - Charles Prince of Citibank in 2007.

That's the mentality in a liquidity driven bull markets. Everyone now knows how the story ended. But must also remember the crazy money made during the bubble.

How you want to play it, up to you....

China’s Long Bull Run
By Kopin Tan
2804 words
2 May 2015
Barron's Online
BON
English
Copyright 2015 Dow Jones & Company, Inc. All Rights Reserved.

China's President Xi Jinping was born in the Year of the Snake, but at heart he is China's biggest bull. Already, China's paramount leader has orchestrated the planet's hottest recent bull market: Over the past year, Chinese stocks available to mainland investors have surged a staggering 119% in Shanghai and 121% in Shenzhen, with the biggest gains coming since November. The offshore stock market in Hong Kong -- open to foreigners and laden with Chinese listings as well as global companies from Prada to Samsonite -- has lagged but is starting to catch up, jumping 13% in April alone.

The scary part: Chinese stocks are braving seven-year highs just as economic growth slows to 7% from 12% five years ago.

You'd think a monster rally egged on by great expectations of monetary easing and market reform would attract a lot of attention, and it has -- starting with the locals. With real estate stagnant and stern restrictions on investing overseas, mainlanders seem only too happy to cheer on a homegrown bull. Local investors recently opened new stock market accounts at a rate of 4.1 million a week, up from about 70,000 a year ago. Many are borrowing to swell the herd, and margin balances have surpassed 1.6 trillion yuan ($258 billion), up from 300 billion yuan 16 months ago. By mid-April, BNP Paribas estimated, more than 70% of mainland-listed stocks were commanding prices exceeding 50 times earnings, while 40% fetched more than 100 times earnings.

Clearly, Red China's bull run can give you a high like you'd get from guzzling too much Red Bull. “Mainland investors' optimism toward the stock market is now far out of line with fundamentals," warns Mizuho Securities' Asian equity strategist Kengo Yoshida. The size and speed of this levitation, and pressure on the economy to live up to rising expectations, increase the likelihood of corrections of 10% or more, which could accelerate as margin traders liquidate their positions.

Now here's the scariest part: Economists and strategists suggest that this bull market has just begun, as China begins to open its stock markets to global investors. At 4442, the Shanghai Composite Index still is 27% below its 2007 peak of 6092. This means long-term investors with horizons of more than three years may need to hold their noses and look to pullbacks to build their Chinese portfolios.

“Despite the run-up in equity markets, this is just the beginning," says Helen Zhu, BlackRock's head of China equities. “Structural-reform progress, rather than cyclicality in economic growth, has played a large part in driving the strong returns, and by reducing the tail risks that have been associated with China." Chuck Clough, CEO of Clough Capital Partners in Boston, which manages several funds including one focused on China, agrees. He thinks the Chinese are just starting to buy stocks again for the first time in recent years. “China is at the beginning of a big movement from savings toward stock investing," he says.

Because China's rally will become more volatile, investors may want to avoid momentarily hot markets like Shenzhen, which is laden with smaller technology and nonfinancial stocks and already commands valuations near 50 times earnings. Instead, Barron's has identified eight stocks that are still reasonable, ranging from Chinese brokerage GF Securities (ticker: 1776.Hong Kong) to Baoxin Auto Group (1293.Hong Kong), a car dealership that benefits from China's aging fleet. Ironically, some of our picks are Chinese companies that once sought the glamour of a U.S. listing, but are now neglected as the fast money flocks east to chase China's surge.


Make no mistake: Xi Jinping wants this surge to continue. It's no coincidence that state-controlled media started cooing about the stock market last year just as Beijing relaxed restrictions on buying shares. “Encouraging robust market sentiment helps Beijing to achieve a number of policy objectives," notes Joyce Poon, Asia research director at the Hong Kong research firm Gavekal Dragonomics. After all, Chinese companies looking to raise capital in recent years have had to issue bonds instead of stocks because share prices were so depressed. So a happier stock market not only increases funding for small enterprises and helps reduce China's ballooning debt, but it also gives the Chinese another investment target besides real estate.

Critics will argue that Xi is merely swapping a bubble in real estate and debt for a new one in stocks. But a “paper" bubble of stock wealth is less malignant than a bricks-and-mortar bubble of empty homes and silent highways. Just look: The U.S. tech bubble of 2000, while painful, ultimately proved less debilitating than our 2007 housing bubble because there wasn't a glut of physical inventory to work through.

Beijing, of course, knows how hard it can be to turn around a $9 trillion economy; controlling a stock market and its media apparatus is more easily done. Today, citizens can trade from as many as 20 brokerage accounts, up from just one. To encourage companies to raise capital in the stock market, regulators sped up initial public offerings and cleared a backlog of 600 pending new issues. In the first quarter, deal volume jumped 38% from 2014's level.

More important, Beijing is taking big steps to liberalize mainland markets: Last November's much-trumpeted Shanghai–Hong Kong “stock connect" scheme lets mainlanders buy eligible stocks listed in Hong Kong (commonly called H shares), while global investors can buy select mainland stocks (or A shares), up to a daily quota. This program boosted trading traffic and will spawn a similar link-up later this year, this time between Hong Kong and Shenzhen.


Xi, who consolidated power so much that he has earned the nickname “Xi DaDa" (literally “Xi the Big"), has a grand plan to establish China as a global superpower. Making the yuan more international and widely held is part of that plan, as is a thriving capital market. Xi has always said that China should pursue “the Chinese dream." And what could be a bigger triumph than a bull market, made in China by the Communist Party, that's the envy of capitalists the world over?

FOREIGN INVESTORS CANNOT AFFORD to ignore China, not when the U.S. bull market is maturing and the stench of disinflation wafts from Europe and Japan. Asian growth is slowing, but, at an average pace of 6.2%, DBS economists reckon it's still enough to spawn an economy the size of Germany's every 3½ years. China, which has cut rates twice since November, still has many tools to stimulate growth: The short-term interest rate is more than 3.3%, versus zero or negative for its trading partners.

Valuations also don't yet inspire vertigo. Shanghai stocks fetch 22 times trailing earnings, versus 49 times in 2007. And Hong Kong's Hang Seng Index fetches 12 times earnings, versus 20 times in 2007. China's onshore stock market is at about 75% of its gross domestic product, still below 90% in South Korea and 150% in the U.S.

The Chinese are upbeat thanks to ample liquidity. Just as U.S. traders believe in not fighting the Fed, the Chinese swear by “don't battle Beijing." “So unless China's policy makers undertake sudden tightening measures, the A-share bull run is likely to continue," notes Chen Xingdong, BNP Paribas' chief China economist.

Gavekal co-founder Louis-Vincent Gave believes that today's biggest macro development isn't oil's collapse but China's commitment to making the yuan more international and convertible. When that happens, the excuse for excluding China from global indexes weakens. If China's weight in the MSCI All Country Index were to tick up from less than Spain's (at 1.7%) to match Japan's (10.6%), index managers will have to scurry to buy Chinese stocks. “Being short China will remain a very dangerous proposition," Gave notes.

Already, brokerage firms are finding it hard to keep pace with this rally. For example, Mizuho on April 17 upped its end-of-June target for Shanghai to 4400 from 3400, only to see the index blow past the new mark four days later. Mizuho thinks the index could reach 5100 in the third quarter, peaking around the time of the Communist Party's big policy meeting each autumn, before pulling back to 3300 by early 2016. “It will be the government's job to curb the bubble," writes Mizuho's Yoshida, but there's less chance of tightening with growth anemic and commodity prices weak.


Meanwhile, China has cut back its stockpiling of U.S. Treasuries and is instead spending its yuan on amassing physical assets across the globe. A booming stock market certainly will help that cause. Among the things the Chinese have already bought: the ancient Athens port of Piraeus; Smithfield Foods and, with it, hundreds of the biggest U.S. farms; and AMC Entertainment and 4,960 movie screens onto which Hollywood projects its American fantasies.

A made-in-China bull run can woo global investors if they're prepared for bumps. Beijing has cut the reserves that banks must set aside, but hopes for a big interest-rate easing cycle may prove optimistic. Matthews Asia strategist Andy Rothman thinks Beijing is comfortable with slower growth because its economic base is now much bigger, and incomes are still expanding. Home prices surged in early 2014, leading to tough year-over-year comparisons in 2015 that should dissipate by the second half. Improving data could test the assumption that Beijing must ease aggressively, and a looming U.S. rate hike could siphon liquidity and life from China's party.

Unlike Japan, where a wilting yen helped lift exports and the Nikkei, China seems hellbent on supporting its currency, at least through November, when the International Monetary Fund decides whether to add the yuan to a basket of key currencies that count toward official reserves. Without currency depreciation, Beijing must work harder to goose growth.

Already, there are concerns that the market is fizzier than it seems. Because Beijing controls so much of corporate China, its market's free float -- the portion of shares available for public trading -- is just 39%; that compares with 75% in Japan and 94% at the New York Stock Exchange. Measuring margin debt against this free float, instead of total market value, shows real leverage may be as high as 8.2%, “above any historical example that we can find elsewhere," notes Macquarie analyst Matthew Smith.

Beijing may even be the one tapping the brakes of this high-speed train. Its securities regulator recently allowed institutions to lend stocks for short selling, and barred margin financing through popular umbrella trusts. Such steps to curb the enthusiasm triggered brief selling, but in the long run may prove healthy. Yet, it makes clear that Beijing is very much the rally's driver.

So, are there any bargains left? Barron's has been bullish on Chinese stocks since we launched our Asia Website on Oct. 15 last year, and many of our stock picks have snagged double-digit gains, including 72% for Hong Kong Exchanges & Clearing (388.Hong Kong) and 80% for Chinese insurer Ping An (2318.Hong Kong). Disciplined traders sitting on big winnings might consider selling half of their positions to lock in gains, while using options to hedge their exposure. They might, for example, buy protective puts on relevant exchange-traded funds like the iShares China Large-Cap (FXI) or SPDR S&P China (GXC). Or replace stocks with call options to remain exposed to further rallies without risking more than the option premiums paid.

ULTIMATELY, THE BEAR CASE for China is similar to the bull case: It's a rally propelled by policy, and it won't stop until Xi Jinping lets it. Until then, strategists expect valuation gaps between stocks that are dual-listed on the mainland and Hong Kong to narrow, especially after Beijing let Chinese mutual funds buy Hong Kong stocks. But don't grab just any Hong Kong ETF, since 40% of that market isn't Chinese. A more targeted bet is the Hang SengChina Enterprises Index, which comprises Chinese companies listed in Hong Kong and trades at 10.5 times earnings. It's tracked by ETFs including Hang Seng H-Share Index ETF (2828.Hong Kong).

Here are eight stocks that still look reasonable:

• Unlike mainland technology stocks that command 68 times what companies earned, versus 46 times historically, financial stocks are still cheap. It's a good time to be a Chinese brokerage, and GF Securities just reported a 205% jump in first-quarter earnings. GF's 2014 return-on-equity of 14.6% is better than its peer average of 11.4%, and stock trading at 16 times projected earnings is lower than 22 times for Citic Securities (6030.HK). GF's Hong Kong listed H shares trade at a hefty discount to its Shenzhen-listed A shares. (See also “http://online.barrons.com/articles/gf-securities-rides-chinas-bull-market-1430209263?mod=BOL_hp_oe," April 28.)

• Baidu is China's Google (GOOGL) and one of its best brands, but the Nasdaq-listed shares (BIDU) are off about 20% since their November high. China's dominant search engine just reported first-quarter revenue growth of 34%, and profits shrank slightly as Baidu spent to promote mobile services to new users in smaller cities. But worries about Baidu losing its stranglehold as search shifts from PCs to mobile devices are overblown, and shares trade at 25 times projected profits, well off its median of 45 times over the past decade. (See also “http://online.barrons.com/articles/baidu-dreams-of-mobile-payoff-1430382887?mod=BOL_hp_highlight_2," April 30.)

• Falling oil prices have fooled some into thinking that Beijing is less committed to clean energy, but Earth's biggest energy consumer has a terrible pollution problem. “Solar stocks are underappreciated right now," says Earl Yen, a Shanghai-based managing director of CSV Capital Partners. His pick: JinkoSolar (JKS), which is off its 2014 high and trades at 8.9 times 2015 profits.

• Another Yen pick is Baoxin Auto. A major Chinese BMW dealer, Baoxin suffered slowing sales with the corruption crackdown, “but as the car population gets older and the secondary market gets bigger," Yen says, “people will spend more on repairs and parts." Analysts see profits growing 17% in 2016, but shares fetch just nine times 2016 earnings.

• Orient Overseas International (316.Hong Kong), a Hong Kong–listed container shipper, benefits from China's plan to build a 21st century maritime silk road linking Chinese ports to Southeast Asia and points as far west as the Persian Gulf. Its superior technology optimizes fleet scheduling, and worries about industry overcapacity have kept the stock 30% off its 2011 peak. Shares trade below book value, and at 9.2 times 2015 earnings. (See also “http://online.barrons.com/articles/SB51367578116875004693704580498713911643860," March 5.)

• Investors lunging at Internet retailers to bet on China's middle class forget that goods ordered online must be shipped in boxes. Nine Dragons Paper Holdings (2689.Hong Kong) is China's largest containerboard maker, and weak profits last year as China's growth slowed shook out less committed investors. Operating margin tops 12%, but shares are cheaper and less leveraged than global peers, trading at 15 times 2015 profits. (See also “http://online.barrons.com/articles/unloved-nine-dragons-is-ready-for-a-lucky-break-1429760667," April 22.)

• China Cinda Asset Management (1359.Hong Kong) is China's largest and only publicly listed distressed-asset manager. Rate cuts lower Cinda's funding costs just as weak growth increases the pool of flailing properties it can browse. The stock has struggled amid concerns about its distressed-loan-book expansion, and fetches just seven times projected earnings, or 1.4 times book value. (See also “http://online.barrons.com/articles/SB51367578116875004693704580500722400252574," March 5.)

• As China's largest online niche retailer of beauty products, Jumei International Holding sure has an ugly stock chart. The NYSE-listed shares (JMEI) lost two-thirds of their value last year amid exposés of third-party vendors selling counterfeit goods on its Website, and a big shift to direct sourcing and quality control hurt results. But makeovers take time, and online cosmetics sales grew 137% each year between 2010 and 2013, versus 60% for online shopping. Shares trade at 26 times 2016 profits and 3.3 times book value -- versus price/book valuations of 9.3 times for Alibaba Group Holding (BABA) and 40 times for Vipshop Holdings (VIPS), an online flash retailer of luxury goods. (See also “http://online.barrons.com/articles/jumeis-makeover-is-more-than-cosmetic-1426582884," March 17.)

E-mail: mailto:editors@barrons.com


Dow Jones & Company, Inc.

Document BON0000020150502eb52001bc

China's stock market bonanza
Zhu Ning
1264 words
24 Apr 2015
China Daily-Africa Weekly
CDAFWE
English
Copyright 2015. China Daily Information Company. All rights reserved.

A mountain of money, pent-up demand and government policies keep the bulls running, but for how long?

After several long years of sluggish performance, China's A-shares market in recent months staged one of the most impressive run-ups ever in global equities markets. Such a bullish run has attracted not only great enthusiasm from domestic and overseas investors alike, but also has drawn many questions from the same crowd at the same time.

For one, China's stock market has displayed a contrary pattern in not following the Chinese economy, instead going in the opposite direction. During the couple of years right after the 2007-08 global financial crisis, China's stock market trailed almost all major indices in the world, despite the fact that the Chinese economy was growing faster than any other major economy.

Things have taken an interesting and surprising turn during the past several months. Despite the sudden and considerable slowdown in the speed of Chinese economic growth, major indices within the Chinese stock market have almost doubled during the same period, leaving investors wondering why the market rallied at this particular time, and for how long the bull market can keep going.

To answer these questions, it helps first to understand why Chinese market rose in the first place.

Nobel prize laureate Milton Friedman once said, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." The same can probably be said of any stock market rally or bubble. Without an accommodative monetary supply, any stock market rally will soon run out of steam.

This may be exactly the reason why the Chinese stock market experienced this rally, despite a subpar economic performance. China's monetary supply has increased more than tenfold since the start of the new century and China now boasts the largest monetary supply in the world, even larger than that of the US, whose economy is still about one-third larger.

In light of such a large amount of incremental monetary supply, the question that has to be answered is: Where will such a large amount of money go? During the past decade, the answer was the Chinese real estate sector.

Real estate was a very attractive investment in China for several reasons. First of all, there was the basic market demand. After years of poor living conditions, many Chinese denizens had a strong desire to improve their living conditions. Secondly, the central government and local governments quickly realized that real estate would lead many other sectors of the Chinese economy and become the driving force of the economic growth. Hence, China rolled out various policy measures to propel the growth of the housing market, which further shaped the expectations of Chinese households and investors, and made real estate even more attractive.

Such basic demand and government support were further boosted by the high leverage of real estate investment and housing prices that only went up until the past year. All this served as a perfect self-fulfilling prophecy: A bullish market attracts more capital and hence sustains the bull market.

However, with growth in the Chinese housing market reaching unprecedented levels in many parts of China, and as Chinese housing prices became higher than those in many developed economies, in absolute terms, the Chinese government and investors both found it hard to sustain that market. Therefore, the nation's attention then turned to the equities market.

Fortunately, after several long years of stagnation, almost all investors in China's equities market felt ready to welcome a new bull market. Further, the valuation of some Chinese listed companies, especially large, blue chip companies that make up the Shanghai-Shenzhen Composite index, was attractive. As a result, domestic and international institutional investors began picking up Chinese blue chip stocks, even if just from an asset allocation perspective.

However, just like many other things in China, the situation can change fast. With the market almost doubling over the past several months, the valuations of blue chips are not cheap anymore. At the same time, the valuations of small and medium-sized companies and companies listed in ChiNext (similar to Nasdaq, for high growth companies) has become so expensive that they dwarfed any index in the world - even the valuations on Nasdaq at their peak during the 1997-2000 Internet bubble.

On the one hand, many institutional investors, experienced individuals and foreigners have started shaking their heads and taking some of their chips off the table. On the other hand, bullish investors note that several government policies, such as more accommodative monetary policies, relaxation of requirements for opening brokerage accounts, and more generous margin trading financing availabilities, all bode well for the market going forward.

After all, many market participants think that the Chinese government is very pleased to see the market go up, and may take meaningful actions to push it up, or at least to keep it up.

Given such encouragement, the Chinese stock market has witnessed an increasingly large number of retail investors, generally referred to as da ma, rush to open brokerage accounts and pour in their money. Such an influx of capital will help the bulls run even farther.

However, as the bullish run becomes more dependent on retail investors, many cannot help but remember what happened when the market experienced a similar magnetizing attraction for retail investors. Right before the Chinese A-shares market crashed from its last peak of 6,100 in 2007, Chinese retail investors had expressed similar zeal with the market, only to suffer from later market slumps and considerable investment losses in ensuing years.

Certainly, there are still valid reasons why the bulls can remain confident, at least in the near term. With the deepening of reforms in many key areas of the Chinese economy, especially in the financial sector, the market can hope for the Chinese economy to stabilize and reform successfully.

During this process, not only will Chinese listed companies' earnings improve, but also listing and information disclosure requirements in the Chinese A-shares market. These measures will be more effective in protecting retail investors and ensuring market fairness and equitability.

Further, with additional liberalization in international capital account flows and domestic interest rate mechanisms, more capital is expected to flow into the Chinese A-shares market. That's another reason many investors bet on the rally to be sustained.

Finally, as is the case in almost every bubble, any Ponzi scheme-like investment bubble is very attractive to investors, as long as one is not the last to catch the time bomb right before the bubble bursts. According to vast amounts of research on historical bubbles and bursts, most investors never believe that they are living through a bubble, much less that they will be the unlucky few who caught the bubble right at its top.

Despite all the upbeat news and reforms in China, all investors still have to bear in mind the basics of finance and investment: the tradeoff between risk and returns. The Chinese real estate market, shadow banking market, Internet financing market and art collection market have all eventually revealed their share of risks in the long run, and so will China's A-shares market, sooner or later.

The author is a faculty fellow at the International Center for Finance at Yale University and deputy dean of the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University.


China Daily Information Company

Document CDAFWE0020150424eb4o0000b

"China's President Xi Jinping was born in the Year of the Snake, but at heart he is China's biggest bull. Already, China's paramount leader has orchestrated the planet's hottest recent bull market: "

It's regretable that this comes from a reputable comentator like Barron's. I'm not even sure which policy in past 18 months or so is directly linked to the stock market because I faintly remembered the first 12 months were pretty tough for Mr Market. When I see an opening statement like this I question the depth, Barron's or otherwise

Also reminded me about Mr Market ignoring the RRR raising from 15.5% to 21.5% in order to choke the property market, and commentators in general mocking the effort, just as they were mocking Xi's anti-corruption drive as paper tiger. And then people with 12 months memory seemed to think that Mr Market was the one that acted voluntarily & accurately by correcting the exuberance. Seriously is it that difficult to figure out which is the horse and which is the cart?

I guess Singapore's property correction was actually Mr Market suddenly wise up and decided to act rationally.

Flood of leverage drives volatility in Chinese equity markets
THE AUSTRALIAN MAY 30, 2015 12:00AM

Scott Murdoch

China Correspondent
Beijing

Trading volume on the Shanghai Stock Exchange has surged this year. Source: Supplied

The Chinese equities market have been the world’s best performer this year, but millions of investors have learnt the hard way this week that bull runs do not last forever.

In a volatile session on Thursday, the Shanghai Composite lost 6.6 per cent, its second-worst one day loss this year.

The main A-listed shares fell a further 8.52 points yesterday to close the week at 4611.75. However, a positive tone emerged in Shenzhen when the Component index gained 187.5 points to 16,100.45. During the session the index traded in a remarkable 1100 point range, after falling dramatically soon after the open.

Shanghai stocks still remain up 43 per cent this year and 133.48 per cent over the past 12 months, while the smaller Shenzhen market is up 122 per cent.

Before Thursday’s sell-off, the markets had risen in the previous seven sessions and turnover had reached a record daily 2.42 trillion yuan ($509 billion).

The Shanghai market was marching towards the 5000 mark, the highest since the global financial crisis emerged in 2008, when news spread that two brokerages, Guosen Securities and Southwest Securities, were tightening margin lending.

Guosen released a list of 275 stocks that would not longer be allowed to be used as collateral against margin loans.

It is estimated margin borrowing on the mainland is now worth about 2 trillion yuan, or about 5 per cent of the market’s total capitalisation.

While the total size is not overwhelming compared to China’s total household savings pool, the number of new accounts has concerned authorities.

It is estimated 100,000 new ­securities trading accounts are opened around the country each day, meaning more Chinese are involved in the equities markets than ever before.

For the government, this is a rising risk it needs to manage. If equities markets plunge and millions of investors lose their fortunes, trouble could unfold.

China is keen to show the world it is embracing the free market concept, and a depressed equities market is the last thing a country as tightly controlled as China wants.

During the bull market run, regulators warned of hyperbole but now on the downside the message is being carefully crafted.

Xinhua, the state-run news agency, published an editorial ­titled “China cool headed in face of meltdown”. It hyped up China’s economic foundations and reinforced that regulators had the situation under control.

“With analysts loudly advising against panic, they cry that short-term volatility does not alter a long-term run supported by economic restructuring and new growth potential,” it said.

“Don’t panic! applies to policymakers too, who are expected to stay cool-headed, focused and attentive.

“New growth engines, a consumer-led marketplace, industrial co-operation overseas, and business-friendly reforms have combined to leave China well placed to cope with the slowdown.”

The timing of the Xinhua piece, late on Thursday night, was curious and certainly a sign that policy makers do not want investors to panic. A version of the editorial was published in dozens of Chinese-language publications in a bid to calm nerves.

JT Asset Management fund manager Huang Jingdong said the market was driven by a wall of borrowed money.

“A remarkable feature of this bull market is leverage. When the market starts to adjust, the fall is amplified by leverage. The positive tone in the market is automatically transformed into a negative one.”

Independent fund manager Lin Yu said the sheer amount of leverage meant risks for the index in the near future was negative.

“The capital driving the market upward is not smart money,” he said. “It is mainly from retail investors which has caused an irrational rise.

“The market is different with the past because we have never seen such a large amount of leverage. If a big adjustment of the market occurs we may see forced liquidations and ultimately a stampede.”

While commentators are, well commenting, the Chinese authorities are acting. And for some bizarre reason the shanghai market is still ignoring the govt effort to cool down the stock market, bizarre because they seemed to have short memories of govt accomplishing what they say they will do, I'm pretty sure the govt will succeed and in the short term I wouldn't be too bullish on China stock market

And as usual when the market crack, commentators will blame the govt, adding this to the irony list. That's why they are commentators.

Investors: the China tidal wave is about to hit
Patrick Commins
868 words
21 May 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

GaveKal's Louis-Vincent Gave wants Australian investors to know they are missing out.

"You are all part of one of the most crowded trades there is - nobody owns China."

Mr Gave is the chief executive and co-founder of one of the most widely respected China research firms, GaveKal Dragonomics. The Hong Kong-based firm also manages money, and it's in his capacity as an investor that he enthusiastically describes himself as a "massive China bull".

His argument is that the global investment community is under-exposed to Chinese stocks and bonds, but will be compelled to increase its exposure over the coming two or three years as Chinese financial assets begin to be included more fully in the global benchmarks that passive - and many active - institutional investors track.

The usual responses from outside observers to the more than doubling in the Shanghai Stock Exchange Composite Index in a year is regret at having missed it, followed by a degree of comfort, inasmuch as such a rapid move is likely to snap back just as quickly.

Gave would certainly agree that most international investors have failed to participate. "Foreigners have completely missed this bull market," he says, pointing to the iShares China Large-Cap ETF - the biggest of its type in the United States.

"The fund has actually had a shrinking number of outstanding shares year to date. So, as China has rallied, American ETF investors have actually been taking profits."

But Gave believes Chinese shares can continue to rise. "So far, it has been a liquidity-driven bull market. Money has come out of Chinese retail investors and into shares," he says. "But the tidal wave that is about to hit - and it is a tidal wave - is foreign investor money."

Gave's advice for investors is blunt: "Either you get in front of it or you are going to be left chasing your tail. I believe we are at the beginning of a massive bull market."

Gave, who spoke exclusively to The Australian Financial Review before his keynote address at the Morningstar Investment Conference in Sydney on Thursday, says investors can participate by getting exposure to Hong Kong-listed "H" shares, which have dual listing with Shanghai and will follow any jump in mainland listed stocks.

"They might not go up in the next three months, but over the next three years it's still a great trade," he says.

They can also invest in the Ironbark GaveKal Asian Opportunities Fund.

Gave argues that Chinese capital markets are going through a historic shift that will lead to its equity and bond markets being included more meaningfully in global indices, after years of under-representation.

The statistics are striking: China has the second-largest economy in the world and the second-biggest sharemarket. It accounts for 14 per cent of global gross domestic product and 12 per cent of total global equity market capitalisation. And yet it represents between 0 and 2 per cent of global stock indices, and is absent from world bond indices. The reasons are obvious. Thanks to capital controls and the limited convertibility of the currency, it has been hard for foreigners to buy Chinese mainland stocks, and even harder to buy bonds, making it difficult for global index firms such as MSCI to include Chinese assets in the world benchmarks that trillions of dollars in passively managed funds follow.

But the introduction of the Hong Kong-Shanghai Stock Connect program has handed foreigners access to listed Chinese companies. Meanwhile, Chinese policymakers are moving aggressively towards full convertibility of the renminbi. In November, the International Monetary Fund will meet to decide whether to add China's currency to the select group reserve currencies, which includes the US dollar, the euro, British sterling and the yen.

"I think that come November, the IMF will vote 'yes'," Gave says. "They will say yes fundamentally out of the spirit of survival and the fact they want to stay relevant."

Gave points to the experience of the Asian Development Bank, which for years denied China a greater seat at the table, only to find itself rendered almost irrelevant by the China-funded Asian Infrastructure Investment Bank.

"If [the IMF] votes yes, then all of a sudden if you are managing the reserves of South Korea, or South Africa, or Australia there are now five official reserve currencies.

"Four of them have short-term interest rates at zero and long-term interest rates between 50 to 200 basis points, and then here's another one we just added to the mix, with short rates of 275 basis points and long rates of 425 - what would you do?"

The answer is that central banks will put more of their reserves into the renminbi. Which is also why Gave is bullish on the $US4.5 trillion ($5.68 trillion) Chinese bond market, of which, he says, only about $US100 billion is foreign owned.

"The potential is for interest rates in China to collapse 100 to 150 basis points", he says, which would translate into a hefty capital return for the holders of the assets.


Fairfax Media Management Pty Limited

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