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| Is Hong Kong now in thrall to China's stock market bubble? |
Let me reconstruct this bubble-tastic story for you that's transferred from China to Hong Kong now: With China's economic growth
slowing down relatively speaking to 7% in Q1 2015 and exports
down 15% year-on-year in March, you'd expect stock markets there to cool down, too. But no, PRC stock markets are hitting highs day after day nowadays as a mania is taking hold. The "
bubble" term is being aptly deployed as unsophisticated PRC retail investors pile in amid a clear economic downturn:
Chinese stocks and economic growth
have long had little to do with each other. Between 2010 and early 2014,
when China boasted the world’s fastest-growing economy, its stockmarket
was consistently among the world’s worst performers. Since July of last
year, this relationship has flipped. Whereas China’s growth has drifted
steadily lower, its share indices have
doubled in value. Does this mean that China’s previously beleaguered markets are now veering into bubble territory?
For
those with a cautious bent, there is no shortage of warning signs.
Three are especially noteworthy. First, valuations are beginning to
look stretched
and, in some cases, plainly absurd. ChiNext, China’s small-cap board,
has a trailing price-earnings (PE) ratio of 90, more than double that of
internet stocks at the peak of America’s dotcom bubble in 2000. Second,
leverage has soared
over the course of the rally. Outstanding loans to stock investors
reached a record 1.67 trillion yuan ($269 billion) as of April 13th, up
some 300% from a year earlier. Finally, many of those rushing to snap up
stocks are small-time day traders with little understanding of what
they are buying. Chinese investors opened nearly 5m trading accounts in
March, a stampede that has continued into April. A survey by China’s
Southwestern University of Finance and Economics found that two-thirds
of new investors last year
did not complete high school.
So there are signs that there's a speculative bubble being inflated in the mainland. Now, though, this mania is spreading to Hong Kong, which is still considered as a gateway to China. Some say it's just a better reflection of China's status as the world's second-largest economy, but I
doubt it:
Advances in China have swelled the value of its shares to more than
$7 trillion and are spreading to Hong Kong, which just eclipsed Japan as
the world’s third-largest market. “It’s the reality of the stock market catching up with the reality of
the economy’s footprint,” Xavier Smith, who oversees international
equities at Centre Asset Management in New York, said by phone. The firm
oversees about $1.1 billion. “For the world’s second-largest economy,
you’d expect to see some of its stocks in the top 10 list. It’s more
bizarre that they weren’t there before.”
Actually, the
real reason why Hong Kong stocks are soaring is that previous
restrictions on mutual fund investors have been significantly relaxed. Before, institutional investors had to be fairly well-capitalized to buy stocks in Hong Kong, but not anymore. So, the Shanghai-Hong Kong Stock Connect [exchange link] allowing mainland investors to buy HK-listed stocks and vice-versa has been dominated by "
southbound" traffic as of late. Those piling into the China bourses in Shanghai and Shenzen can now go to Hong Kong as well to get their fill. From a
Bloomberg article late last week on why Hong Kong was set to eclipse Japan in market capitalization:
The value of equities listed in Hong Kong rose to $4.9 trillion on
Thursday, catching up to the $5 trillion total for Japanese stocks. The
broadest measure of Hong Kong shares soared 1.3 percent Friday as the
Topix index slid 0.3 percent. The world’s two largest markets are the
U.S. at $24.7 trillion and mainland China’s $6.9 trillion, according to
data compiled by Bloomberg that updates daily after the New York close.
The stock mania that pushed the Shanghai Composite Index up 89
percent in the past 12 months is spreading to Hong Kong, where turnover
surpassed Japan each day since Wednesday. Chinese authorities last month
allowed more domestic funds to access the city’s shares through a
cross-border bourse link, spurring inflows that narrowed the discount on
Hong Kong stocks compared with mainland shares. Baring Asset Management
Ltd. says the rally in Hong Kong has room to run.
So it happened this week. That the Japanese stock market has been rallying as well given easy money policies there makes you appreciate the astronomic rise of Hong Kong stocks since it's been overtaken while on the upswing. I don't mean to sound alarming, but it seems to me that PRC authorities have inflated stock markets not only in Shanghai and Shenzen but now also in Hong Kong. Make no mistake: they are
goading Jian Average on. For what reason I am not entirely clear about since they will bear the brunt of the fallout: If this bubble pops, they will have a lot to answer for as ill-informed Chinese investors lose their shirts.
