Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19
Where is the Top for Natural Gas? - 7th Nov 19
Why Fractional Shares Don’t Make Sense - 7th Nov 19
The Fed Is Chasing Its Own Tail; It Doesn’t Care What You Think - 7th Nov 19
China’s path from World’s Factory to World Market - 7th Nov 19
Where Is That Confounded Recession? - 7th Nov 19
FREE eBook - The Investment Strategy that could change your future - 7th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

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

6 Critical Money Making Rules