Confused by the post-tariff China stocks rally? Take a look back to 2015

[TaiShang]

Confused by the post-tariff China stocks rally? Take a look back to 2015

CGTN Published: 2018-09-30


Some investors were probably not surprised when US President Trump imposed a further round of import tariffs worth 200 billion US dollars on Chinese goods, but a rally of more than six percent in Shanghai stocks since those tariffs were announced definitely surprised everyone. Still remember the crazy Chinese bull market in 2014-2015? Analysis shows that some of the catalysts from then may have reappeared to some extent.

An investor looks at an electronic board showing stock information at a brokerage house in Shanghai on September 7, 2018. [Photo: VCG]


To be frank, Chinese stocks were traded irrationally back then, with extremely high leveraging activity one of the main factors that spurred on the bulls.

Still, there were three other fundamental reasons, with stock market internationalization, the central bank's liquidity injection and infrastructure investment among the top catalysts.

The fact is that those three factors may have returned once again, contributing to the stock gains seen in the past few days.

Stock market internationalization

The huge rally in Shanghai stocks a few years ago started in November 2014, the same month that the Shanghai-Hong Kong Stock Connect system was launched.

Given the low participation rate among foreign investors and huge domestic speculative flows in mainland markets, such a program would theoretically balance all types of investors and overhaul the Chinese capital market gradually, improving the investment atmosphere over a period of time.

Earlier this week, MSCI released a statement saying that the index provider proposed an increase to the inclusion factor of large cap securities, from its current 5 percent level to 20 percent in two phases next year, while adding mid cap securities with a 20 percent inclusion factor in 2020.

Although those inflows are relatively small compared to the Shanghai stocks' trading volume, it should help balance the nation's capital flows, after capital outflows accelerated in the past few years.

A meaningful inclusion would help to send billions of dollars flowing into the A Share market, while more balanced cross-border flows would increase flexibility for the People's Bank of China implement its monetary policy.

Signs of infrastructure investment

Copper is one of the key materials in infrastructure building, and China is the world's top buyer. Its price has fallen by almost 20 percent in the first eight months of the year due to slowing Chinese industrial demand. However, copper prices have recovered by over 5 percent since early September.

Copper rods are seen at a factory. [File Photo: VCG]


One valid explanation behind the rising price is that China has stepped up its infrastructure investment in a bid to counter external uncertainties from trade frictions.

Due to a slowdown in Chinese growth five years ago, copper prices began falling in 2014. Prices however started to rebound in January 2015, reaching a peak five months later.

Meanwhile, Shanghai stocks reached their peak in June 2015 before retreating sharply.

Data analysis shows the correlation between the Shanghai Composite Index and copper prices hit 0.81 in the past five years, and that may well explain why the recent rally in stocks is partly down to increasing industrial demand.

In recent days, property and financial sectors led the gains in Shanghai stocks, which again could be signs that the nation has stepped up fiscal stimulus and infrastructure spending to boost domestic demand.

Accommodative monetary stance

Despite the weakening yuan and narrowing China-US bonds yield spread, the PBOC didn't follow the Fed in raising interest rates this week.

The Chinese market will be closed during the October 1 Golden Week holiday period, but thin liquidity in the offshore market may disturb the holiday peace because directional moves may become more exaggerated.

That could see the offshore yuan weaken above the key level of 6.9 versus the dollar if the greenback continues to move higher. A looser monetary stance may risk pushing the offshore yuan above 6.9 next week. Since the PBOC decided not to follow the Fed's rate hike, it may convey the message to the market that monetary policy will be more growth-oriented, and its tolerance for the yuan's weakness could increase a little for the time being.

In the PBOC's latest easing cycle, it started to cut the benchmark lending rate in November 2014, coinciding with the time when Shanghai stock prices began to take off.

What's next?

These three reasons may explain the recent Shanghai stocks rally, in spite of the escalation in trade tensions. It should be highlighted that the stock rally in 2014-2015 lasted less than nine months, as the impact from stock market internationalization, the central bank's liquidity injection and infrastructure investment didn't stay for long.

Therefore, before we see a meaningful growth improvement and de-escalation in trade tensions, this current stock rebound could again be short-lived.

http://chinaplus.cri.cn/news/business/12/20180930/190579.html

 

[Hamartia Antidote]

I guess any rally, no matter how small, is something to finally cheer about

https://www.marketwatch.com/story/a...-latest-us-tariffs-targeting-china-2018-09-17
Shanghai stocks bounce back from nearly 4-year low as U.S.-China tariff fight hits another level


China’s stock market is now worth only five Apples

 

[TaiShang]

Foreign investors swear by A shares

By Shi Jing in Shanghai | China Daily | Updated: 2018-08-20

Overseas investors' committment to China's key A-share market remains unchanged. [Photo/IC]

Jan-July period sees $23.4 billion in inflows despite fears over trade rows

Overseas investors' committment to China's key A-share market remains unchanged despite the less-than-stellar performance of stocks in the past few months due to concerns over trade frictions.

At a news conference on Aug 10, Gao Li, spokesperson of the China Securities Regulatory Commission, said overseas investors pumped in 161.6 billion yuan ($23.4 billion) into A shares in the January-July period.

According to GF Securities, the corresponding figure for last year was 118.9 billion yuan, suggesting foreign investments rose almost 36 percent year-on-year.

Although the world trade frictions have intensified since June, capital inflows in June and July alone totaled 49.8 billion yuan.

As Gao explained, A-share companies' profitability has continued to increase since the beginning of this year, indicating their stocks may be good investment options.

The stock connect mechanisms between Shanghai, Shenzhen and Hong Kong have been one major channel for overseas capital inflows into the A-share market, market mavens said.

Data from Shanghai-based market information provider Wind Info shows that the benchmark Shanghai Composite Index slumped by over 14 percent in the January-July period while the Shenzhen Component Index dropped by nearly 18 percent.

The PE ratio of the A-share market is around 16 at present, hovering near its historic low.

Xu Xiaoqing, chief economist at DH Fund Management, said the A-share market's valuations are now low based on historical data. So, the coming two years could be an opportune time for investors to bag handsome bargains.

Agreed Xie Yunliang, an analyst at Guotai Junan Securities. US market valuations are comparatively higher at present, which is piling pressure on global investors. Given that the A-share market may be bottoming out and set for a rebound, investors may shift their attention to China, he said.

Inclusion of the A shares in Morgan Stanley Capital International's emerging markets index has also been a key driver of overseas investments.

The first phase of the inclusion on June 1 included only 2.5 percent of the total number of stocks in the A-share market in the emerging markets index. The second phase raised the figure to 5 percent on Tuesday. Meanwhile, the MSCI China Index included 236 A shares.

According to Shanghai Stock Exchange data, foreign capital has been flowing into stocks that are part of the MSCI indexes, via the Shanghai-Hong Kong Stock Connect. The inflows surged substantially to 11.27 billion yuan on May 31 alone, the last trading day before the MSCI index inclusion took effect.

That number hit a record high in terms of daily transaction volume throughout the first half of this year, which was also about 2.5 times the average amount of the monthly total of 4.4 billion yuan.

Analysts from China Merchants Securities wrote in a note the A-share market's 5 percent inclusion will hopefully bring in another 40 billion yuan of investments into the Chinese stock market by September.

Experts from Shenwan Hongyuan Securities predicted that the additional inflows may well reach 1.8 trillion yuan in the long run if all of the stocks in the A-share market are included in the MSCI indexes.

Easing of regulator restrictions on foreign investment has also helped inject more vibrancy into the market, market insiders said.

In June, the State Administration of Foreign Exchange and the central bank eased regulations on qualified foreign institutional investors or QFIIs and renminbi-qualified foreign institutional investors or RQFIIs. Under the new regulations, there is now no lockup period for QFIIs' and RQFIIs' capital. Besides, such investors are allowed to hedge foreign exchange.

"The opening-up policies for QFIIs and RQFIIs will help with the sustained development of China's capital market," said Hua Changchun, chief economist of Guotai Junan Securities. "The more diversified the investors, the healthier the market will be."

 

[Nan Yang]

Why So Many Underestimate China’s True Economic Power
Sep 27, 2018

China’s economy is so large – and growing so rapidly – that it’s difficult to get a true read on the size of its influence on the world stage, according to this opinion piece by David Erickson, a senior fellow and lecturer in finance at Wharton. Before he taught at Wharton, Erickson was on Wall Street for more than 25 years, working with private and public companies to raise equity strategically.

Some of the rhetoric out of Washington recently has been suggesting that the U.S. is “winning” the trade war because the U.S. stock market is near all-time highs as China’s domestic equity markets have declined significantly. While the domestic Chinese equity markets have suffered since the trade tensions started earlier this year, I think that premise underestimates the economic power of the rapidly growing number-two economy in the world and really needs a bit of context.

The Chinese equity stock market — as represented by Shanghai stock market — actually peaked in 2015. This is not too dissimilar from the market cycles we have experienced in the U.S. in the last 20 years. This includes what we saw in the Dow Jones Industrial Average (DJIA), which reached 11,000 in May of 1999 but took more than seven years to reach 12,000. While the DJIA advanced from October 2006 to July 2007 from 12,000 to 14,000, it took almost six years, until May 7, 2013, before it advanced to the 15,000 milestone. For the NASDAQ market, the cycle was even more dramatic where it took 15 years to reach new highs in 2015. Markets do go through cycles.

More...
http://knowledge.wharton.upenn.edu/article/almost-everyone-underestimates-true-economic-power-china/

 

[oprih]

Nice, even Chinese stock markets are performing well. Everything is doing well in China. No wonder an ameripig above is not happy. It's ok he can always cheer on his clown president being a joke in the global stage.

 

[TaiShang]

Rest of the article shared by @Nan Yang. Can't help putting it here in full because it has nice data.

**

When we started our trip, given that many of our students had never been before, I wanted to give them a few numbers to provide some context as to the size and scope of the Chinese economic opportunity. Here are some of them — all approximations:

• a population of 1.4 billion people;
• 620 million mobile internet users as of 2015, according to China’s Mobile Economy: Opportunities in the Largest and Fastest Information Consumption Boom;
• 400 million in the middle class.

And to get some sense of the rapidity of the change:

• Exports have grown for the last 30 years at a 17% compound annual growth rate (CAGR), making China the world’s largest exporter at $2.3 trillion in 2015, according to The China Questions – Critical Insights into the Rising Power;
• In 1980 about 70% of Chinese labor force was in agriculture; by 2016 only 30% was in agriculture;
• In 1980 only 2% were university educated; by 2016, approximately 30%;
• In 1980 Shenzhen had a population of 30,000; by 2016, Shenzhen had a population of some 12 million.

What I realized as we progressed through our visits to these companies and investors was that these numbers were understated, and significantly under-estimate the economic power of China. Let me outline three of the specific attributes that we learned about and discussed as part of our trip:

Capital Formation – the World’s Largest Equity-raising Market

When I first came to China as a 34-year-old investment banker in 1998, I flew to Beijing to pitch a Chinese tech company looking to raise about $100 million in an IPO. Back then, for a $100 million tech IPO, really the only game in town was the U.S. NASDAQ market.

Back in 1998, as companies from emerging countries (e.g., Brazil, China, India, Russia) started to go public, with local currency restrictions and liquidity constraints — as well as other challenges, such as a lack of international investors — there were three or four markets that attracted the bulk of the international listings – London, Hong Kong, New York/NASDAQ and Tokyo. For most companies from emerging countries in Europe, the Middle East and Africa, London was the preference; for most companies from emerging countries in Asia and Latin America, New York/NASDAQ was the preference. NASDAQ, until probably 2014 when Alibaba went public on the NYSE, was the market where most growth companies globally went to list.

Things have changed dramatically in the last 20 years.

Now, markets in Hong Kong, Shanghai and Shenzhen collectively represent the largest IPO market in the world as can be seen in the chart below from KPMG’s “Mainland China and HK 2018 Mid-Year Review: IPOs and Other Market Trends.”



To give another perspective, the second graph below, via Barclays, shows the 15-year trend (203-2017) of the top five countries by issuer nationality with the most IPO volume. Since 2008, Chinese companies — versus those from any other country — have collectively raised the most IPO capital in seven of the last 10 years. What has changed over this 15-year timeframe is that most of Chinese activity prior to 2008 was the capital raising for state owned enterprises (SOEs), while activity post-2008 is for more traditional privately owned companies. The high water mark for Chinese IPO capital formation was 2010 when there was a combination of factors that drove this activity.

2003–2017 Global IPOs
Top 5 Countries (By Issuer Nationality)



The third chart below is from a report by Siguler Guff, one of the earliest Chinese private equity fund of funds, estimating that only 35% of China’s GDP in 2016 was represented in public equity market capitalization (versus in the U.S. at 143%). This gives you a sense of why we might be in the very early stages of this Chinese capital raising trend:

Stock Market Capitalizations Relative to GDP in 2016



In addition to public equity capital formation, companies in China also receive a significant portion of the private equity capital globally. Estimates by Bain & Company in their 2018 Asia-Pacific Private Equity Report suggest that approximately $73 billion was invested in greater China in 2017 by private equity firms — almost half of the capital invested across the Asia-Pacific region.

Not only is there significant capital being deployed by the leading private equity firms globally, but also by some of China’s largest companies — such as Alibaba and Tencent. Estimates suggest Tencent has invested over $30 billion since 2015. While some of this investment has been in international companies such as Tesla, Spotify and Snap, Tencent has also been a significant investor in China, notably in 13 Chinese multi-billion-dollar companies that have gone public since the beginning of 2017, including Meituan Dianping, which has just raised over $4 billion. Tencent owns about 20% of the company. In three of those big companies, Tencent had major stakes of 40% or greater – China Literature, SEA and Sogou. Tencent also announced earlier this year that wholly owned Tencent Music will list in the U.S. Alibaba, meanwhile, has also made many significant investments, including as the largest shareholder of Ant Financial, which recently raised about $14 billion, called the largest single fundraising globally by a private equity company. Alibaba owns about a third of the company, rumored to be valued at $150 billion.

While China’s leadership in IPO capital raised over the last several years could change if trade tensions with U.S. become prolonged, the demand from private equity capital firms and Chinese corporations is likely to continue, and may increase — as we have seen in the U.S. in recent years — if IPO activity lessens.

Innovation – Developing the World’s Biggest e-Payment Market

One of what may be China’s best economic secrets is that it is home to not one, but two of the most powerful e-payment platforms globally. Ant Financial’s Alipay and Tencent’s WePay are estimated to each have more than 500 million active users. Trying to provide comparison to the U.S. market is difficult, but it is quite clear that the e-payment market in the U.S. is just a fraction of China’s. Two metrics providing some context are that, according to Statista, PayPal, the largest U.S. comparable platform company, has 244 million active users globally; and the U.S. banking system overall is expected to have 161.6 million digital banking users by next year.

“BCG in its 2018 Global Wealth Report estimated that China represents approximately 15% of the upper net worth and ultra high net worth individuals (HNWIs) in the world.”

While Tencent’s WePay is largely linked to WeChat, Tencent’s dominant messaging service, Alipay, has been quite visibly building partnerships outside of China especially in Southeast Asia. With the Chinese mobile payment market estimated at approximately $5.5 trillion in 2016 and with 45% penetration of Chinese internet users(as seen in the chart below from Statista), China is clearly the biggest e-payment market in the world.

Share of Internet Users Worldwide Who Used a Mobile Payment Service in the Last Month as of Third Quarter 2017, by Region



Given this tremendous opportunity for Ant Financial, one of the discussions on our trip was with a panel of public equity institutional investors that target China about whether in the long-term, Ant Financial would exceed the value of Alibaba, its founding shareholder that spun what was then Alipay off to shareholders in 2011. With the ability to potentially be the e-payment platform in international markets where e-wallets are prevalent but technology is lacking — such as in Africa, the Middle East, Latin America and Southeast Asia — the potential thesis is that Ant has a tremendous opportunity with limited international competition versus Alibaba, which has largely been limited to China, and has the challenge of Amazon and other competitors internationally.

Wealth Creation – World’s Fastest-growing Market

BCG in its 2018 Global Wealth Report estimated that China represents some 15% of the upper high net worth and ultra high net worth individuals (HNWIs) in the world, and that those groups are growing at a 22% CAGR. BCG defined personal wealth for upper HNWIs as being greater than $20 million but less than $100 million, and ultra HNWIs as having wealth than $100 million.

As shown in the chart below from BCG’s report:

The U.S. Holds More Than 30% of the World’s Upper High Net Worth and Ultra High Net Worth Wealth



If you add up the numbers for greater China, including Hong Kong and Taiwan, the investable assets for upper- and ultra high net worth individuals represent more than $5 trillion dollars. This, coupled with the approximately 400 million people characterized as the Chinese middle class, creates a significant source of wealth potentially as the Chinese economy matures. This is why Chinese wealth management is considered one of the biggest opportunities in financial services globally. This opportunity, like many in China, is in its early stages with both product development and regulation. Recent issues with companies like the Anbang Insurance Group, the Chinese insurance company that grew its wealth management business significantly and was seized by the government earlier this year, has caused the Chinese government to step up its involvement in regulating this sector.

Potential Issues

While the three attributes presented show how China’s economic power is likely being underestimated, there are also potential issues besides the ongoing trade tensions:

• The ability for the governmental framework to support the rapidity of the evolution and innovation of the Chinese economy. Of the three attributes examined, all have largely developed in the last two decades. Given this rapid development, does the Chinese government have the knowledge and ability to regulate and support? While any government’s regulatory framework would be tested by the rapidity of this evolution, China, unlike most major economies globally, was largely not impacted and its systems were untested by the Global Financial Crisis 10 years ago. One of the reasons the Chinese financial system and the major Chinese state-owned enterprise banks were largely unaffected is they had just been capitalized with public equity capital in the years leading up to 2008. Also, these banks had not yet expanded their activities internationally.

“… If other governments internationally are potentially uncomfortable with a company like Ant being the e-payment platform … significantly changes Ant’s opportunity internationally….”

One specific concern stated frequently is the size of the Chinese shadow banking system. While the phrase is often assumed to be negative, it is not. Shadow banking exists in most markets globally, including in the U.S., and refers to banking activities that occur outside the regulated banking sector. Because these activities happen outside the regulatory framework, there is often less disclosure and information available. Entities like corporations, non-bank financial companies, pension funds and other institutions often engage in these activities, for example lending, to improve their returns. Also, with recent developments in China regarding investing vehicles for individuals like peer-to peer lending, concerns have heightened. These concerns often have to do with two primary things: the relative size of the shadow banking systemversus the regulated banking system; and the lack of disclosure/transparency often affiliated with activities in China increases the anxiety.

• The possibility of government(s) intervening to curtail or stop some of the innovation in China’s economy. Notice that “government” above potentially is not just limited to Chinese government intervention. For China specifically, the recent announcement that video game rules would be put in place significantly impacts Tencent, with gaming being its largest business. In terms of international government involvement, the U.S. Committee on Foreign Investment in the U.S. (CFIUS) earlier this year blocked the acquisition of MoneyGram by Ant Financial for national security reasons — an example of what forces could limit some of the innovation and success as companies look to expand outside of China. Similarly, if other governments internationally are potentially uncomfortable with a company like Ant being the e-payment platform — or partnering — in their country, it significantly changes Ant’s opportunity internationally, as well as potentially the long-term investment thesis.