The Shanghai and Hong Kong stock markets have been going up since the middle of last year. One of the reasons is that Chinese investors are taking money out of a faltering real estate market and jumping into a rising stock market. Westerners can invest in Chinese stocks via ADR’s or directly in the Hong Kong market. But, what are the dangers of trading Chinese stocks? TheStreet.com thinks that the Chinese stock market is ready for a fall.
China has created a new cross-border investment channel called the Shanghai-Hong Kong Stock Connect, which will enable investors in Hong Kong and the Mainland to trade a specified range of listed stocks in each other’s market.
- The Shanghai Stock Exchange’s benchmark equity index is up 23% on the year through April 9 and has jumped 94 percent over the last 9 months.
- Valuations on Chinese tech stocks have surged to an average 220 times reported profits, the most expensive level among global peers.
- There is 1.1 trillion yuan ($180 billion) of debt outstanding that has been used buy stocks in Shanghai.
- Emerging market stock guru Mark Mobius, Executive Chairman of Templeton Emerging Markets Group, thinks the Chinese stock gains are unsustainable.
- Bearish wagers on the Shanghai Stock Exchange have climbed more than threefold in the past nine months and reached a record 7.46 billion yuan ($1.2 billion) on April 9.
Although Chinese stocks have had a good ride there are now numerous dangers in holding or trading Chinese stocks
The Asian Stock Bubble
We have been concerned for years about the collapse of a Chinese real estate bubble. Now as real estate is deflating in China those ahead of the curve bought stocks. Anyone who bought Chinese stocks last year ought to be looking at getting out. Bloomberg concurs as it notes that Asian stocks are all bubbly.
It’s only April, but 2015 already seems to be the year of the Asian stock bubble. In addition to mainland China’s bubbly markets, the region is dealing with two other equity booms that don’t jibe with economic fundamentals.
In Hong Kong, gains are racing well ahead of global rallies even as China’s slowdown accelerates. Mainland companies listed in the city jumped another 4.3 percent Monday, even after news of an unexpected 14.6 percent plunge in Chinese exports in March. The Hang Seng Index — which grew 7.9 percent last week — has also been unaffected by the mainland’s sputtering real estate market. And something similar is happening with Japan’s Nikkei market. The country’s economy is limping out of a recession, and Bank of Japan officials have been bracing for disappointing inflation numbers. Yet the stock market is trading near 20,000 for the first time in 15 years.
It would appear that investors are under the impression in both Japan and China that government actions will support both markets in the absence of sound fundamentals. The dangers of trading Chinese stocks right now lay in betting on more gains.
Don’t Trade What You Cannot See
Our long term concern about the dangers of trading Chinese stocks is their lack of transparency. There is too much that is hidden in the land of Communism and Managed Capitalism. To a degree the situation is reminiscent of Japan in the late 1980s when their economy seemed set to take over the world and then a mountain of hidden loans came to light and the country has dealt now with a quarter of century of deflation.
China ETFs
Bloomberg Business reports on the Chinese stock rally and China ETF investors.
U.S. investors are now returning to the iShares China Large-Cap ETF after it jumped 24 percent since mid-March, adding about $90 million on April 10 for the biggest one-day inflow since August. The fund tracks the 50 largest Chinese stocks trading in Hong Kong.
Another BlackRock Inc. fund, the iShares MSCI China ETF with $2.3 billion in assets, has attracted $636 million this year to provide investors with exposure to the Hong Kong rally. The MSCI ETF invests in 140 companies listed in the former British colony.
Trading ETFs in the USA is one means of reducing the transparency part of trading Chinese stocks. But the underlying issue is that this is a market poised to falter and anyone trading Chinese stocks needs good information and should pay careful attention when these markets start to collapse.
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