Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

China Finally Stops Fighting the Stock Market

Stock-Markets / Chinese Stock Market Apr 15, 2015 - 07:48 PM GMT

By: Peter_Schiff

Stock-Markets Although China's economy has been leading the world in annualized growth since the days that mobile phones had retractable antennas, there have always been some aspects of the country's commercial and financial system that loudly broadcast the underlying illogic of a Communist Party's firm control of burgeoning capitalism. China's stock markets were one such venue where things just didn't add up...literally.


In recent days, the stock market in Hong Kong has rocketed upward, notching the kinds of gains that have inspired many market observers to warn of a dangerous bubble forming. But as we see it, the rise is not the result of an unfounded mania gone wild, but the logical outcome of a deliberate regulatory push from Beijing to allow Chinese markets to function the way markets do in the developed world. In other words, this is not a bubble rally but a move towards normalization.

Until late last year China's stock markets have been regulated with two very different customer bases in mind, creating two very different price structures. Foreign buyers have been allowed to buy shares on the Hong Kong stock exchange but have been prohibited from buying on the Shanghai exchange. On the other hand, domestic Chinese buyers were prohibited from buying in Hong Kong, but could buy in Shanghai. This meant that the two markets were subject to very different supply and demand dynamics, and very different price trajectories.

Foreign interest was subject to a variety of inputs that did not concern local investors: The strength of overseas markets and economies, the global interest rate environment, opinions about the strength of the Chinese economy, the foreign exchange market, and countless other factors. Chinese buyers were more influenced by the domestic economy, financial regulatory incentives, the local real estate market (which for many years was the investment of choice for the growing middle class), and the movements in gold (another popular investment alternative for rank and file Chinese). This created a tale of two markets, with performance of the Shanghai and Hong Kong markets diverging wildly over the years. The dynamic was most easily observed in the relative valuations of companies that listed themselves in both markets. These dual-listed companies were often assigned one valuation in Shanghai and a very different valuation in Hong Kong. Normally such gaps would create an "arbitrage" opportunity for investors to close the gap. But the strict financial regulations in China prevented such normalization. That is until recently.

For much of the early years of the last decade, when the Chinese economy was in the midst of a spectacular wave of growth, and many Chinese citizens began to buy stocks for the first time, much of the outsized appreciation occurred in Shanghai. By 2007, dual-listed stocks traded at a premium in Shanghai over Hong Kong. But the market crash of 2008 hit Shanghai shares far harder. Perhaps disillusioned by the losses, or perhaps attracted to opportunities in the property market, Chinese investors pulled out, sending Shanghai into a seven-year bear market. Over that time, Hong Kong largely held steady, and so by 2014 dual-listed companies traded at a significant premium there.

However, even with the relative strength of Hong Kong, Chinese market performance over the last seven years has been dismal in comparison to the West, even though Chinese economic growth continues at a rate that far surpasses the developed world. For example, the United States has seen its stock market double in the years since the depths of 2009, while delivering average annual GDP growth of just under 1.2%.

In many ways the performance of financial markets has seemed to eclipse the health of the underlying economy as the true test of global leadership. With this sore spot in mind, the new regime of Chinese leaders that took position in 2013 and 2014, led by General Secretary Xi Jinping and Premiere Li Keqiang, seemed determined to take energetic action to level the financial playing field between East and West.

The most significant change they have implemented thus far has been the Shanghai-Hong Kong Stock Connect, which takes major steps to open up the barriers that have segregated China's market structure. The provisions will greatly increase the ability for Chinese to buy in Hong Kong and for foreigners to buy in Shanghai. The reforms also change banking regulations and interest rate structures in a way that should incentivize Chinese citizens to take savings out of the bank and invest in shares. It is hoped that these moves will finally give China a stock market that mirrors its economy.

The reforms seemed to have had their intended effect. Beginning late last year, China's investor class finally began embracing shares, pulling the Shanghai market out of its seven-year dive. The exchange powered up 90% in just six months. Clearly, the action is getting a little frothy. It has been reported that in March alone, Chinese investors opened more than 4.8 million stock trading accounts, a boom of historic proportions. The pace has kept up, with an additional 1.5 million accounts opened in the first week of April (the Chinese government now allows citizens to hold up to 20 separate accounts).

It is assumed that the new interest in shares has been helped by a slowdown in Chinese residential real estate, which had come to be the single greatest focus of the typical Chinese investment portfolio. Having cashed out of property (and to a lesser extent gold), many Chinese turned their attention to the beaten down Shanghai exchange.

At the end of the recent rally, Shanghai shares traded over 16 times earnings, a premium to the Hong Kong Index, which traded at just over 13 times earnings. When the Connect program finally allowed the Chinese into Hong Kong late last month, many Chinese finally jumped in to close this arbitrage, sending Hong Kong up to a seven-year high, finally eclipsing the pre-crash high. (In contrast, the S&P 500 is currently 35% higher than its pre-crash high.) The Hang Seng in Hong Kong rose a blistering 15% in the month between mid-March and mid-April. In this sense, it should be clear that Main Street Chinese investors are finally holding the whip, not the hot foreign money that had been the primary river of Hong Kong performance in years past.

Many have speculated that this current mania is a dangerous flash in the pan that will burn investors who arrive late to what they believe will be a short-lived party. But it's important to realize two things that should give the rally legs. One is regulatory and the other fundamental.

While the Connect laws have greatly liberalized the ability to buy stocks anywhere in China (which by law must now be settled in RMB), a quota system remains in place to keep the lid on purchases. At present, evidence suggests that the bottleneck has kept the pace below where it would be in an unrestricted market. So far, the maximum quota has been hit every day since the Connect regulations went into effect that allow the Chinese to buy in Hong Kong. This suggests that the demand from Chinese investors has only just begun to be realized. Hong Kong should stay strong as long as it's being pulled upward by a surging Shanghai.

While Western news outlets loudly proclaim the "death rattle" of the Chinese economy (which appears set to slip below 7% - my God how awful!), it is important to realize just how superior that growth rate remains above the moribund West. In China, 7% is described as anemic, whereas in the U.S. 3% is described as booming (although 3% growth in America is looking to be increasingly unlikely). Even if the Chinese markets, which still have plenty of catch-up to do with the West, can capture a portion of this strength, investors could be rewarded for years to come.

The moves also show how the markets in China have been hindered by regulation. The removal of these barriers has revealed hidden strengths. In contrast, U.S. markets have been helped by robust Fed policies designed to keep money flowing into stocks at all costs. Remove these pro-stock monetary incentives, and the possible crash here in the U.S. could become the opposite of the current rally in China.

By: Peter Schiff, President and CEO Euro Pacific Capital & Russell Hoss, Portfolio Advisor at New Sheridan Advisors

Best Selling author Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital. His podcasts are available on The Peter Schiff Channel on Youtube

Catch Peter's latest thoughts on the U.S. and International markets in the Euro Pacific Capital Spring 2014 Global Investor Newsletter!

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

Peter Schiff Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in