Meanwhile, on the China side of the pond, perceived overheating in fixed-asset investment is sparking domestic tightening measures which have sent the A-share indices back to levels seen prior to the July run-up on IPO speculation.
Common wisdom over the last several years in the investment community has been that China exports cheap goods to the United States, earning forex revenue – mostly US dollars – which must then be put to work. China's central bank invests these hard-earned dollars in US treasury bonds which keeps US interest rates low, raising the value of US residential real estate. America's consumers then monetize the paper gains on their homes in order to continue consuming beyond their means. This encourages China's continued investment in export-driven industries, and thus the cycle continues.
The weak link in all this has been the risk that the American consumer will stop borrowing in order to buy Chinese DVDs and other relatively low priced imports.
Authoritative economic studies in the United States now indicate that any slowdown in housing price appreciation (ie what is happening now in the US) will not likely have as serious an effect on US consumption as many observers have feared since the Tech Wreck in 2000.
Official US statistics show both increased job growth and rising incomes; moreover, anecdotal evidence indicates that American workers feel more confident about their job prospects than they did a year ago. Thus, any strategy which shorts China in anticipation of a possible slowdown in the US is unlikely to succeed.
Betting against China would also probably put you on the wrong side of fund flows as well.
International investors are displaying an interest in China equity investments that has not been seen in some years. While hedge funds have shown periodic interest in China equities, now larger, more index-focused US institutional investors are looking to Chinese stocks, including our beloved A-shares.
This is not to say that making money in equities is now going to be easy. China's A-shares continue to exhibit volatility in the face of policy change. Whereas the return of IPOs raised the index from mid-June through mid-July, a tighter monetary policy is now sending it back to the levels seen before the rally.
The resulting weak sentiment forced Air China to reduce its IPO by nearly 40% as institutions stayed away in droves. Air China's US$576 million listing was well below the US$1.75 billion sought by Daqing Railway, a play on coal transportation.
The same weak sentiment has pounded large caps and mid-caps alike, dropping the share prices of stocks even in the Red Dragon Fund. Gansu Mogao has tumbled to RMB5.1 from a heady RMB6.41 last month. Stalwart Baosteel is off a fraction to RMB4.08 from RMB4.1 last month, while Bank of China – the A-share – has fallen to RMB3.24 from the RMB3.58 we paid for it just last month.
Market sources note that the fall in Bank of China's A-share price – to below that of the H-share price – doesn't reflect concern over the bank's fundamentals but rather the direction of fund flows as investors depart, fearing economic tightening.
The road ahead
So what are we poor widows and orphans to do? "Stay the course" seems to be the popular alternative these days, but with China's 5,000-year history, this can be a costly option. Instead, we're going to do the manly thing and retreat to cash until institutional players decide it's safe to come back in, or until we see another expansion of the QFII quota.
Accordingly, we bid a fond and perhaps temporary farewell to our favorite agricultural stock, Gansu Mogao, cashing out completely for now before we find ourselves locked into this small cap if the market really stagnates. We will reduce sharply our holdings in Baosteel and Bank of China, to 500 and 300 shares, respectively, and hold cold, hard cash until market sentiment recovers.
Boring, we know, but it certainly beats losing money!
You must log in to post a comment.
Yes, I would like to receive emails from China Economic Review. (You can unsubscribe anytime)
Copyright © 2018 SinoMedia Group Limited All rights reserved