Jpmorgan Chinese Investm... Share Discussion Threads

[binladin] 06/7/2015 11:06

150p target now....

[binladin] 06/7/2015 10:21

Running out of cash and freefall.

[loganair] 03/7/2015 16:37

China fights to stem bloodshed as market loses another 10% this week:

From last November until June 12 the Chinese stockmarket headed towards seventh heaven, more than doubling in size. Yes, doubling. In fact it grew by 110%, but since mid-June the music has stopped and the market has been gripped by feverish volatility, losing more than 40%, with 10% wiped off the books in the past week alone.

Money is surging in and out of China, but mostly out, making the walls of prices in Shanghai go red, and the faces of government regulators, who are investigating unidentified “speculators”.

With barely a pause the index has crashed from over 5,120 to Friday’s 3,686 in around three weeks,

“I think the government measures have been positive, because this is just a lack of confidence. Everybody feels the pressure to stabilise the market. This morning things were more stable, but the afternoon saw another drop, it’s a vicious circle,” says Market Analyst at Haitong Securities Zhang Qi.

A slew of policy moves including a cut in interest rates and relaxed margin trading rules has failed to stop the slide, which has had some traders frantically running to stand still, trying to reverse big paper losses.

[binladin] 03/7/2015 13:27

Average P/E ratio in China is 20. No wonder the stocks are plummeting more pain ahead in my opinion...
Chinese banks have ratios of 80 - 90"......expect a freefall to 120p...?.imo

[binladin] 03/7/2015 13:18

Freefall coming as I I pull money out of China and bring it home...

[binladin] 03/7/2015 11:39

This will go down on Monday as well...Greece uncertainties

[binladin] 03/7/2015 11:26

175p today Immenent

[binladin] 03/7/2015 09:05

The index has fallen 30 percent and jp Morgan has fallen 20 percent another 10 percent fall from here...7 percent fall only today.....

[binladin] 03/7/2015 09:02

Freefall should go to 150 p...

[loganair] 02/7/2015 09:31

China’s economic growth has been cooling in recent years, with 2014 marking its slowest GDP growth rate in a quarter century. But that doesn’t signal anything is amiss. It is entirely unsurprising that the world’s second largest economy cannot keep up such a blistering rate of expansion.

However, deeper warning signs are starting to emerge. Part of that has to do with the extraordinary run up in China’s stock market over the past year, which is increasingly looking like a bubble starting to pop. The Shanghai Composite, an index of all stocks traded on the Shanghai Stock Exchange, had spiked by 40 percent so far this year and has doubled from mid-2014, and the Shenzhen Composite surged by a jaw dropping 90 percent since the beginning of 2015.

But the retreat could be on. China’s Shanghai Composite has plummeted over the past two weeks, falling around 25 percent. Fears that the bubble is popping appear to be spreading. Since June 12, the two exchanges have seen $2 trillion in market capitalization go up in smoke. The government has intervened, cutting interest rates authorizing state pensions to invest in stocks, allowing for nearly $100 billion to flow into the exchanges. That appeared to calm the markets as of June 30, which closed up nearly 5 percent.

Despite the rebound, China’s stock exchanges have suddenly been hit by extraordinary volatility – monthly trading volumes exceed six times the value of China’s $10 trillion market cap. The selloff is likely not over yet, and as concerns that the stock market is becoming detached from China’s slowing economy start to sink in, volatility will likely continue.

To be sure, the long-term fundamentals for China are compelling. And even in the short-term, the Chinese government could paper over the financial mess, putting a band aid on the problem. It has shown a willingness to actively intervene and further government stimulus in an effort to stop the freefall could inflate prices temporarily.

[loganair] 30/6/2015 12:08

We might want to consider turning to one of the world’s biggest economies, emerging superpower, and now official sufferer of a bear market.

Yes, it’s China. And the turbulence in its markets over the last week or so makes the knock-on effect of Greece’s drama look tame…

A bear market takes hold in China:

Chinese stock markets have enjoyed spectacular gains over the past year or so. But a correction is well underway now.

The Shanghai Composite Index is down by more than 20% since it hit a seven-year high just a few short weeks ago, on 12 June. That means it’s officially in a bear market (20% down is a ‘bear’, 10% down is a ‘correction217;).

It’s clear that the government is getting a little worried. The central bank, the People’s Bank of China, cut the one-year lending rate by 0.25% to 4.25% at the weekend. That’s the fourth cut since November. It also reduced the level of reserves banks have to hold.

The government has also been using the state media to tell everyone – effectively – ‘it’s safe to get back into the market!’ Apparently, say the regulators, an ‘excessively fast correction’ is not healthy, which suggests they’d be more than ready to intervene if things don’t go their way soon.

That might be why the stock market index rebounded sharply this morning to end higher, having swung around wildly during the session.

There are reasons for the correction. They range from disappointment that index provider MSCI decided against including the market in its global benchmark index – as yet - earlier this month. There have also been cutbacks on margin lending (the ability to buy stocks with borrowed money).

But the pundits are rattled. Morgan Stanley analysts reckon that the market has topped out. And they’re not the only ones.

So should we be getting out of China?

China is following a well-worn economic path

We don’t think so. China was due a correction, no doubt about it. You don’t see indices double in a year (the Shanghai Composite had in fact more than doubled) and expect smooth running from then on in. As Capital Economics put it: “Turnover on the Shanghai and Shenzhen exchanges was up 400% year-on-year in the second quarter. That rate of growth is clearly unsustainable.”;

And it’s probably healthy if it corrects a bit further. But this doesn’t mark an end to the good times, or a lasting bear market.

Why not? As professional investor Rupert Foster noted in MoneyWeek magazine a couple of weeks ago, China is following a well-trodden economic pathway – one where the government takes a key role in directing resources in the economy. It’s one that was followed by both Japan and South Korea. And if you look back at their development, what’s happening in China is not that surprising.

Japan and South Korea started off with economies driven by government-channelled investment in heavy industry and infrastructure. Same goes for China. During that period, they had their first stock market bubbles. Same happened with China in 2007.

Then they transitioned to consumer-driven economies, and in both cases, stock markets returned to their highs, and never looked back. And that’s where China is now.

So while it might be a bit of a rollercoaster ride, we don’t think China’s bull market is over yet – not by a long chalk. So if you already own China, hang on.

And if you don’t, it’s time to do a bit of homework on how you might want to get exposure when the dust settles.

[loganair] 27/6/2015 09:35

Last week’s price declines in China followed months of soaring equity prices forged by government moves to open up hitherto relatively inaccessible parts of the domestic stock market.

Since plans to tighten lending rules were announced earlier this month (which threaten to make it harder for domestic investors to buy shares with borrowed money) an exodus from parts of China’s “A”-shares market appears to have begun.

[loganair] 26/6/2015 15:53

Miners fell to the bottom of the index, after a note from research firm Morningstar forecast that steel demand in China had peaked. They were also weighed down by a spectacular slump in China's stock market, the Shanghai Composite, which tumbled 7.4% in Friday's trading.

China's stock market has been on an incredible run over the past year, and two weeks ago boasted a 12-month return of 150%. But after investors sparked a violent sell-off last week, some have warned the country's stock market bubble has burst. The Shanghai Composite is down a whopping 18.8% over the last two weeks.

Today's fresh falls have hit shares in the UK's two investment trusts focused on the country. Fidelity China Special Situations (FSCC) tumbled to the bottom of the FTSE 250, down 7.2% at 149.5p, while JPMorgan Chinese (JMC) fell 5.9% to 182.8p.

[loganair] 19/6/2015 22:26

Dale Nicholls, Manager of Fidelity China Special Situations:

"From my ten years of investing in China, I struggle to think of a better time to find opportunities. Yes, there are some clouds on the horizon, but these are part of the reason I’m so excited.

"For years, the benefits of China have been easy to see, but now they’re a bit less obvious. While many investors are focusing on the short-term economic outlook, I’m looking at the country’s far-reaching reforms that aim to turn its economy away from exports and towards its own consumers. This could create a great environment for companies to grow, and while other investors are nervous, I am seeking to boost performance by searching for opportunities at a good price that they are missing out on."

One of the world’s most exciting markets:

China has a population of over 1.3 billion and a rapidly growing middle class. Its economy is already the 2nd largest in the world by nominal GDP and it’s in the middle of a vast programme of reforms that aim to make it a freer market where companies can flourish even more.

Dale focuses on three types of companies – those with good long-term prospects, cash-generative businesses and those with strong management teams. In many cases, these factors are not well understood by the market, so they are not reflected in valuations.

He also focuses on smaller companies, as these are often less well researched and, therefore, are more likely to be mispriced. However, smaller companies also tend to be higher risk, so meeting the management is essential for Dale to understand their prospects and monitor their progress.

Dale stresses that investors must take a long-term view with this trust, as patience is sometimes required for these factors to be recognised.

"The Directors believe that China is too large a market for investors to ignore, so we launched this trust to give people a way of participating in the growth of the Chinese economy.

"Of course, stock markets don't tend to follow economic growth exactly, so we think it is important to see the trust as a long term investment.

"The Directors have instructed the manager to invest in companies and sectors that supply the needs of China's rapidly growing middle class, as we believe the country's rising prosperity has a strong and lasting momentum.

What’s your outlook for the coming months?

Although the economic situation is a little subdued, I think the market sometimes gets so caught up in headline numbers – such as economic growth and property prices – it can miss the long-term opportunity. For me, this is the government’s current reform programme and its shift to a consumer-driven economic model.

It’s true that growth is likely to be slower, but it will still compare very well to many other major economies. I also believe there will continue to be a good environment for companies to grow, particularly businesses in the areas of the economy that the government is focusing on, such as consumption. As valuations are currently attractive, I think this looks like a good time to be investing in China.

Why is the reform programme so significant?

It’s hard to overstate the importance of the country’s reform programme – it is one of the biggest stories for China in 2015. The aim of the reforms is to provide a solid foundation for China’s next phase of development.

One key change is the announcement of the Hong Kong-Shanghai Stock Connect programme. This will allow international investors to access the domestic Chinese stock market without the need for Government permission and give Chinese investors the opportunity to access international equity markets.

There is also the introduction of market-orientated pricing mechanisms across a range of sectors, plus reforms focusing on the efficiency and profitability of State Owned Enterprises, including the introduction of corporate practices we take for granted in the West, such as management incentive schemes.

In addition, the government is taking steps to release pent-up consumer demand through changes in social welfare, such as the hukou system. This will effectively give 100 million migrant workers the same social and health care benefits as the residents of the cities they work in.

[loganair] 17/6/2015 10:11

Emerging markets: Slow growth, long-term vitality by James Saunders Watson:

The slowing of China’s economic growth pace, from a sprint to something more akin to competitive marathon running, has raised questions not only about its own prospects but those for the group of bigger emerging markets of which it is seen as the leader. But, we believe, there is plenty of evidence that this alleged reversal of fortune has been exaggerated and that the outlook for China, and for “emerging Asia” in general, remains positive.
China’s pivotal role in the global economy

Chinese New Year on February 19, 2015 saw the Horse give way to the Goat.

Characteristics of those born in the Year of the Horse, according to the traditional eastern zodiac, include a tendency to be easily distracted, while those of people born in the Year of the Goat include kindness and a love of peace.

For those hoping for better news this year from the world’s second-largest economy, the Chinese horoscope proves, at best, a somewhat-opaque guide.

Perhaps the International Monetary Fund (IMF) can do better. In April, the fund held its Spring meeting in Washington, a chance to take a health check on the world economy and peer into the near future.

At a time when China’s slowing growth is seen as symbolic of a general fall from favour of the emerging-market economies, what the Fund’s top people had to say was encouraging for those who feel the doom and gloom has been overdone, both in terms of China and of many of the other emerging giants, of which it is seen as the leader.

The view from the IMF:

Thus the April 2015 edition of the fund’s World Economic Outlook [WEO] forecast a slowdown in Chinese growth from 7.4 per cent in 2014 to 6.8 per cent this year and 6.3 per cent next year.2 But, this seemingly bad news may be nothing of the sort.

At a press conference in Washington on April 14, Gian Maria Milesi-Farretti, of the fund’s research department, said: “We think it is a good slowdown for China. It is associated with a more balanced pattern of growth and with a reduction in vulnerabilities.R21;

He added: “Our basic assumption is that policies will do less to push growth at all costs, and this is going to have some short-run negative effect on the level of growth but positive medium-run effects because you have slower growth of credit, slower build-up in imbalances, and ultimately you are heading towards a place where you have a more balanced structure of the macro economy.”

"Developed countries ought to be delighted. For years, the west has complained about China’s “export model”, which allegedly has allowed it to build up huge trade surpluses across an under-valued exchange rate."

China’s leadership has suggested it is amenable to shifting the focus to domestic demand, but the West has been sceptical.

Beijing’s balancing act:

On May 27 2011, in a regular report to Congress5 on the international economic scene, the US Treasury suggested China may not be serious about reforms: “China is not allowing the exchange rate to serve as a tool to counter inflation in its own economy. The policy complicates the adjustment needed for broader financial sector reform. It works against China’s stated goal of strengthening domestic demand.”

As Mr Milesi-Ferretti pointed out 3, China is very definitely rebalancing the economy towards domestic consumption and away from breakneck export-led growth and the rest of the world seems nervous. A case, perhaps, of being careful what you wish for.

On April 18, 2015, Christine Lagarde, managing director of the IMF, underlined the institution’s positive view of China: “There is strong confidence in growth continuing in China, certainly not at the level that China has had in the last decade but growth which is of a different nature, more quality growth with a migration from investment to consumption, which seems to be quite deliberate and supported by the authorities.”

The wider emerging markets picture:

Regarding emerging markets more generally the picture was mixed. At the April 14, 2015 press conference, Olivier Blanchard, the IMF’s chief economist, said: “If you turn to emerging markets, the decrease in potential growth is even more visible and it comes from, again, aging in a number of countries, in many countries, and a decrease in productivity. What we do not see is the decrease pre-crisis, but since the crisis, and probably coincidentally, rather than due to the crisis, we see a decrease in potential growth.”

But within this overall view there were, aside from China, some strong performers.

Take India, about which the WEO said: “Growth is expected to strengthen from 7.2 per cent last year to 7.5 per cent this year and next. Growth will benefit from recent policy reforms, a consequent pick-up in investment, and lower oil prices.”

The outlook is less happy in Brazil: “The economy is projected to contract by one per cent this year—more than two percentage points below the October 2014 (WEO) forecast. Private sector sentiment remains stubbornly weak because of unaddressed competitiveness challenges and the risk of near-term electricity and water rationing,”

But there is better news for those emerging-market economies that are oil consumers rather than producers in the plunge in the price of oil, which has nearly halved since the Spring of 2014 from about $110 a barrel to about $60. In 2014, according to the Organisation of Petroleum Exporting Countries (OPEC), out of total world oil demand of 91.15 million barrels a day, India accounted for 3.79 million barrels and China 10.46 million barrels, together making up nearly 16 per cent of the total world oil demand.

As the WEO noted; “In…oil importing emerging market and developing economies… lower oil prices will reduce inflation pressure and external vulnerabilities.R21;2
More to come from emerging markets

In short, the IMF seems to have concluded that both the “China slowdown” and the loss of faith in the emerging markets have been over-done as, indeed, perhaps was the euphoria over the “BRICS” (Brazil, Russia, India, China and South Africa) of a few years ago.

Indeed, at the end of last year the United Nations Conference on Trade and Development (UNCTAD) reported that patterns of trade in goods in relation to developed and developing countries were continuing to converge, as the former group’s deficits and the latter group’s surpluses both fall. In other words, they are becoming more like each other.

The WEO sound an upbeat note, reminding the world just how important the emerging markets remain as a powerhouse of global expansion; “Emerging markets and developing economies still account for more than 70 per cent of global growth in 2015.”

A story that’s far from over:

"China is rebalancing its economy away from an over-reliance on exports towards consumer spending at home, which will have the benign effect of increasing Chinese demand for imports."

But although this is precisely the course of action long urged on China by the developed world, the reaction now that it is happening has been less than supportive.

The suggestion is that China and those emerging markets of which it is seen to be the leader are now facing a perhaps prolonged period of retrenchment. But falling oil prices and domestic reforms are big plus points for China, India and others. It would seem that the emerging market story is far from over.

Since 1993, the changing face of China’s economy has been scrutinised by the investment managers of the JPMorgan Chinese Investment Trust, which was the first such trust to focus on the “Greater China” region of China, Taiwan and Hong Kong.

Please remember that investments in emerging market may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems and may be illiquid. Most of the fund invests in companies from a particular market sector. Investing like this can be riskier than investing across many market sectors. This is because the value of the fund can go up and down in value more often and by larger amounts than funds that are spread more widely, especially in the short term.

[loganair] 12/6/2015 17:30

Reasons to be positive about China:

Dale Nicholls, manager of the Fidelity China Special Situations admits some of the negativity towards China is justified but argues that should not blind investors to the huge opportunities in the country.

While China is slowing, he says the sheer size of the economy ($10 trillion) means that the 7% growth expected this year represents $700 billion of wealth creation, equivalent to around a quarter of the UK economy.

The shift to a consumer-led economy means future growth should be more sustainable, if lower than in the past. ‘This is still a ripe environment in which the strongest companies can grow,’ says Nicholls.

China’s debt levels are rising fast and the level of non-performing loans held by banks is expected to soar, which is why Nicholls doesn’t invest in Chinese banks. Nevertheless, they are not as dangerous as that might sound with among the lowest loan-to-deposit ratios in the world, he says. The manager adds that while corporate debts are high, consumer debts are low.

Nicholls also dismisses fears of a property bubble. While property prices in many of China’s biggest cities have soared, so have incomes, he says, which means affordability is not as stretched as much as you might think. While there has been over supply of new buildings in some areas, reports of ‘ghost towns’ are overstated, he claims.

Looking forward:

Nicholls may have reduced his holding in Alibaba, China’s e-commerce giant, to under 2% of the fund, but he is still excited by the growing use of the Internet, which nearly half of the population have yet to adopt: ‘China’s shift to online represents one of the biggest commercial opportunities most investors will see in their lifetimes,’ he says.

Similarly, the process of urbanisation and shift to consumption still have a long way to go. ‘Much has been made of the recent anti-corruption crackdown, and this has had an impact at the luxury-end, but I believe that this should have little impact on the underlying drivers behind mass market consumption,’ he writes.

Healthcare and infrastructure also remain big themes in the portfolio with Shanghai International Airport one of the biggest holdings in the fund.

Nicholls believes the Chinese government will continue to drive reform and open up the economy, creating more investment opportunities. ‘From a stock picking perspective, the opening up of the A-share market is really exciting and I look forward to continuing the search in this market for the many opportunities it offers.

‘At the heart of it all, I still believe stock prices follow earnings and cash flows – and I see strong opportunities for growth in both.’

Nicholls appears to be signalling that the trust could be due another period of turbulence, but it’s notable his long-term confidence in China remains intact.

[loganair] 05/6/2015 18:41

China Just Upped Its Gold Game - By Jason Simpkins | Friday, June 5th, 2015

It's called the “Silk Road Gold Fund.”

Wielding some $16 billion, it figures to be the largest gold fund the world's ever seen.

And it's poised to support gold prices, tighten China's grip on the market, and expand the role of the yuan in global trade.

If that seems like a lot, it is.

It has to be, because China's ultimate plan is to remake the current world order — an order defined by the United States and governed by the dollar.

That's no small goal. And it won't be achieved over night.

But piece-by-piece, the plan is unfolding.

Here's the latest...

The New Silk Road:

The Silk Road Gold Fund will raise $16 billion (100 billion yuan). Shandong Gold Group will put up 35% of that sum and Shaanxi Gold Group will contribute 25%. The rest will come from private and retail investors.

Once the funds are gathered, China will start taking stakes in gold miners and gold mining projects.

Specifically, China is targeting gold mines along the ancient Silk Road, traversing the Middle East and Central Asia.

This is all part of a much larger “New Silk Road” initiative, China unveiled last year. The goal is to recreate the route with complementary land and sea routes that form a loop connecting Asia, Africa, and Europe.

China envisions a vast network of roads, railways, and ports, as well as “capital convergence and currency integration.”

The country’s president, Xi Jinping, says the initiative (also known as the ‘One Belt, One Road’ plan) will help double the size of China’s economy over the next decade, bringing $2.5 trillion of additional trade for all those involved.

It's already made some headway.

China launched the New Silk Road initiative with a $1 billion electrical line in Central Asia and a $10 billion deep-water port in Crimea.

The gold fund is just the latest development.

Indeed, Central Asia is rich in resources. It has huge deposits of chromium, copper, zinc, and uranium, oil, gas, and of course, gold.

Kazakhstan produces around 22 tons of gold each year, a figure comparable to neighboring Kyrgyzstan, which produces 18 tons. And Uzbekistan is the world's seventh-largest producer, mining 102 tons per year.

China is both the largest producer and consumer of gold, playing a significant role in determining the overall direction of the gold market. This new fund, and the expansion of the Shanghai Gold Exchange, will further its clout — all to the end of marginalizing the dollar and expanding the role of the yuan.

China in Charge:

Just by itself, the New Silk Road gives China a tremendous amount of economic leverage.

It effectively creates a massive trade network that totally excludes the United States. It also excludes the dollar.

That is, traditionally, China and its trading partners have had to convert their local currencies into dollars in order to trade. Every nation does. The dollar is used in about 80% of cross-border trade. That's what gives it its primacy.

But that's something China is working to change. It wants to use its currency, the yuan.

So for the past few years it's been orchestrating massive currency swaps with its partners.

In fact, China has signed currency swap deals worth 3 trillion yuan with 28 countries and regions including the EU. These deals let China trade and invest in foreign assets without U.S. dollars. They also expand the role of the yuan.

Then, there's the gold. China has been aggressively stockpiling gold for decades. It's also been rather secretive about its purchases.

Some suspect it may one day use the metal to back its currency. Others think it's looking to strengthen its bid to replace the dollar as the world's major reserve — either with yuans or Special Drawing Rights (SDRs). At the very least, it's working to make Shanghai the world's preeminent bullion trading hub.

Whatever the intent, it's bullish for gold. By investing in mining projects and loading up on bullion China is supporting gold prices.

Gold's been hammered by the recent resurgence of the dollar, but it's just about bottomed at this point.

Commerzbank Bank expects gold prices at $1,250 per ounce by the end of the year, up from $1,175 now.

But here's the thing...

If China succeeds in its ultimate objective, if the dollar's role in global trade shrinks, creating a huge glut of greenbacks, gold will soar to incredible heights.

Then, with the world's largest gold reserves, stakes in major mining operations spanning the continent, and trillions of yuan coursing through Asia and Europe, China will be firmly in charge.

[amt] 01/6/2015 12:34

Yes it was at a large discount so catching up I suppose.

[archambos] 01/6/2015 08:41

Up 10.5p this morning, anybody know why? But yippee!!!!!!!!!!!!!!!!!

[loganair] 30/5/2015 12:20

Why the Chinese bubble won’t burst – at least, not just yet by Matthew Partridge:

The Chinese market has had a wild ride this week, experiencing one of its biggest falls this year on Thursday.

It’s certainly been a hot market, as my colleague John Stepek noted on Tuesday. “Locals are piling in with borrowed money” and “the government is piling on the stimulus”.

As a result, “one key market has doubled in less than a year”.

It’s scary stuff. And a market that is fuelled by borrowed money tends to be particularly fragile - “using borrowed money to bet on anything is dangerous” since “if the market falls, then you’ll have to cover any losses”, which can lead to a “cascade”; of selling.

Yet that said, “there are some very strong long-term reasons to remain exposed to China”. For a start, “the Chinese government is very keen to open up, deepen and expand its capital markets”.

For instance, the new Mainland-Hong Kong Mutual Recognition of Funds programme has just been launched, allowing fund managers to sell Hong Kong-registered funds directly to Chinese investors for the first time.

Secondly, “China is also aware that it faces a tricky balancing act in its desire to shift to being a more consumer-centric, modernised economy”. As a result, it “has also launched a range of potential public private partnerships worth more than $300bn to build everything from water-related projects to motorways”.

Finally, “while China has already gone ballistic, this could easily continue”. Since the Chinese market is still under-owned by foreign investors, “plenty more people are going to be scrabbling to get hold of them”.

[loganair] 30/5/2015 10:00

Market indices open the door to China By Graham Smith:

Last year’s contrarian investment proposition for some has turned out to be a rewarding choice. China’s mainland stock markets have more than doubled in local currency terms since last summer1. The prospect that China may be about to take a larger share of benchmark emerging market indices could herald a longer term, seismic shift in global markets.

It comes down to this. Currently, China accounts for less than 3% of the MSCI All Countries World Index, an important benchmark for fund managers that aim to track or beat global stock markets2. Yet China has the world’s largest or second largest economy (depending on which type of measure you use)3.

The discrepancy – and it’s a yawning one – is that index rules, such as how accessible shares are to foreign investors, disqualify a large proportion of China’s stock market from inclusion.

Contrast that with America which, by virtue of its policy of making shares freely tradable anywhere, makes up 50% of the MSCI AC World Index2.

That means where eastern growth meets western accounting, something ought to give.

China started the ball rolling last November, by launching the Hong Kong-Shanghai Connect system. That opened new routes for both foreign and domestic individuals to invest directly in “A” shares listed in Shanghai. Since then, mainland exchanges have surged in value.

The response from western index makers has been and remains a guarded one. There’s good reason for this caution too. A sudden increase in China’s representation in global indices could cause a sharp rise in demand from tracker funds far in excess of the daily and aggregate ceilings imposed on shares traded via the Connect programme.

The fact that China’s currency is not yet fully convertible remains an issue too.

Even so, FTSE Russell unveiled new “transitional” emerging markets indices with 5% weightings in Chinese “A” shares on Monday4.

MSCI is expected to announce similar weightings for its existing emerging markets indices when it reveals the results of its 2015 Annual Market Classification Review on 9 June.

Meanwhile, the bubble-making ingredients appear to be in place. Much of the recent rise in mainland shares (in both Shanghai and Shenzhen) has been driven by domestic investors buying shares with borrowed money (so-called margin trading).

For foreign investors considering taking the plunge, that makes the decision a more complicated one.

What would domestic Chinese investors, who have pushed “A” shares higher this past year, do if foreign funds begin to take a bigger share of the market? That’s hard to predict. They could take profits straight away or hang on for more, in the knowledge that foreign allocation shifts take time.

Or it may not turn out that way at all. Markets have a habit of surprising most of us and there’s no reason this time should be any different. Unexpected negative political and economic developments could still cause a market exodus, particularly when recent gains have been so pronounced.

At least valuations in the broader market look reasonable – despite some bubble-like behaviour, the Shanghai market trades on around 23 times the earnings of the companies it represents6. That’s only a bit higher than world equities generally (19 times) and is down to Shanghai starting out from such a low point in valuation terms last year7.

One thing is more certain and that’s the unveiling of the Connect programme last November speaks of the growing openness of China. It suggests the government intends to allow market forces to play a bigger role while imposing less of a hand from the centre, as it signalled it would during China’s Third Plenum in 2013. That being the case, this short term market boom could be a sign of greater things to come.

[amt] 26/5/2015 07:40

The Hang Zeng is still way below its all time high while many markets are at all time highs so no reason why the market shouldn't go higher. It seems a good scenario of 6 or 7% GDP growth, lowering interest rates and propery cooling. I don't understand why analysts always compare growth with the past. It's much harder to grow something that's large than when it was small as it were. Analysts don't seem to get that point.

[loganair] 22/5/2015 15:39

Why China's astonishing rally has further to run:

China's stock market is on fire: the Shanghai Composite index is up nearly 40% so far this year, and over 12 months has made an astonishing 142.4%.

And the rally shows no signs of slowing. The index is up 6.8% this week while the Shenzhen Composite - which is more focused on technology stocks - is on track to post its weekly gain since 2008, up a whopping 11.4%. You can see just how much China has outpaced other global markets in our exclusive Accumulator data table, which covers the week to yesterday.

That has prompted fears among some investors that the country’s stock market has entered bubble territory. But Andy Rothman, China investment strategist at fund group Matthews Asia, is not one of them.

As a veteran China expert, having lived and worked in the country for 20 years as a diplomat and economist, Rothman sees the strong rally as evidence the Chinese stock market is playing catch-up after years of stagnation.

After crashing with the rest of global stock markets when the financial crisis hit in 2008, shares in China then refused to track the spectacular growth of the country’s economy, as the likes of former Fidelity China Special Situations manager Anthony Bolton will know all too well. Now, with economic growth slowing, the stock market is making up for lost time.

Stock market plays catch-up:

‘It’s catch up,’ said Rothman. ‘It seems a bit abrupt that it’s doing all that catch-up in six months – but overall we’re still in the catch-up phase and there’s more to go,’ he said.

He added that the rally did not share the excessive borrowing evident in many overheated markets of the past.

‘Has the stock market got ahead of itself? Is it in a bubble? For me, bubbles are about leverage, but there’s not a lot of leverage. I’m hesitant to call it a bubble,’ he said. ‘To me what would be a bubble is people with $100,000 putting $150,000 into the market.’

China’s opening up of its market to foreign investment has helped to spark the rally. Last year it opened the Shanghai-Hong Kong Stock Connect, allowing much more foreign money to flow into the country.

Despite this, retail investors still dominate China’s ‘A-share’; market – the name given to Chinese stocks listed domestically, rather than on the Hong Kong stock market. ‘Today, 80% of shareholders in the A-share market is retail,’ said Rothman. ‘Almost everybody wants to have a couple of thousand in the market. People are not in general putting their life savings in – they are gambling a bit.’

China’s population of notoriously prudent savers, accustomed to a poorly-performing stock market, were now rushing to take part, he added. ‘The savings rate is very high. That’s one of the things that makes the consumption story all the more remarkable,’ he said.

‘Where is the liquidity coming from the A-share rally? You had people sitting on a lot of money in the banks, making no interest, but not with much confidence in the market going up.’

More money could flood in:

More support from the rally could come from further liberalisation of the stock market. China is expected to allow more foreign investment in the Shenzhen later this year, in the same way it has opened up the Shanghai.

Nitesh Shah, research analyst at ETF Securities, which offers the China A-shares ETF, said this move had already been partially priced in to Shenzhen shares.

But he argued the ongoing rally on the Shanghai index after the opening of the Connect suggested the Shenzhen market could have further to run once more foreign money actually arrives.

And he pointed to a further catalyst that could support Chinese shares. When index provider MSCI last reviewed its emerging markets index in June last year, China A-shares did not make the grade due to the barriers for foreign investors.

The results of this year’s annual review are due next month, and even if China’s efforts to open up its markets do not result in inclusion this time, MSCI has left the door open to an interim decision to admit them before 2016’s review.

That could lead to a flood of money into China’s market from index trackers and exchange traded funds around the world. If MSCI were to include A-shares weighted according to the market capitalisation, they would make up around 13% of the index, driving around $180 billion (£115 billion) into the market, according to Shah.

While that is unlikely due to the market disruption it would cause, even an MSCI decision to include them with a much smaller weighting of say, half a percent of the index, before slowly it building up, it would still lead to $7 billion of fund money entering the market.

‘MSCI remains very, very closed on this topic,’ said Shah. ‘Speaking to a few fund managers, they believe there is a strong chance of inclusion.’

Peter Sartori, head of Asian equity at fund group Nikko Asset Management, also pointed to the impact this could have on the Chinese stock market. ‘China is enacting reforms that could one day necessitate index providers to start including mainland shares on regional benchmarks, thus opening up a huge pool of previously untapped capital,’ he said.

‘Today, China represents 15% of global gross domestic product yet makes up only 1.7% of the MSCI All-Countries Index.’

Property worries:

But it’s not all good news for China. Some investors are worried about its slowing economic growth, and in particular its property market, where house prices have started to fall after nearly a decade of growth at an annualised rate of 8.4%.

While the days of double-digit economic growth seen before the financial crisis are now long gone, China’s absolute growth in gross domestic product (GDP) will continue to climb, given the much higher base from which it is now starting each year, said Rothman.

And while the property market is now undeniably softer, Rothman said he did not see the signs of a crash that have worried other commentators, who point to the disparity between house prices and average wages.

‘Residential developers are not selling to the average person. 20% of people buying a home in China are paying all cash, and there’s a 30% minimum down payment. In the US, in 2006 [the peak of the lending boom], the median down payment was 2%,’ he said.

‘In financial terms it’s completely the opposite of what happened in the US 10 years ago. It’s like the US housing market in the 1950s and 1960s.’

While the property downturn was hurting developers, the pain was not being evenly spread out, he said. While sales were down 8% last year, and likely to fall a similar amount in 2015, the largest developers have reported double-digit sales rises. ‘In a market which is soft, people really want to buy from the big names.’

Chinese companies gather strength:

As more foreign money continues to pile into China, some investors will find it impossible to resist joining the flood. Rothman argued that investors who had previously tried to tap into the Chinese consumption boom by investing in Western companies were finding that strategy harder to justify.

‘In the last 10 years a lot of investors played the China story through foreign companies and now it’s increasingly hard to do that,’ he said.

‘Domestic brands in the consumer space are grabbing market share away from foreign companies. When I used to talk 10 years ago to multinational companies they told me their competition was from other multinationals. They are now saying it’s from domestic companies.

‘They are doing a better job in marketing, tailoring their products for the Chinese market. If you are talking about shampoo, ice cream or diapers, these days there are good quality Chinese brands.’