China ma­nia reaches eq­ui­ties

Financial Mirror (Cyprus) - - FRONT PAGE -

Over the past 12 months, China’s Shang­hai Com­pos­ite in­dex has grown by a whop­ping 152%. The mar­ket cap­i­tal­i­sa­tion of Chi­nese stocks has sur­passed $10 trln for the first time, and it is clear that traders are flock­ing to in­vest in Chi­nese as­sets. The only ques­tion is: where are all these in­vest­ments com­ing from, and is the ris­ing mar­ket price still rooted in the fun­da­men­tal data?

There is cur­rently a de­bate rag­ing within the an­a­lyst com­mu­nity re­gard­ing what’s next for Chi­nese stocks. Bill Gross, the for­mer “Bond King,” an­nounced in early June, that we are on the verge of “the short of a life­time.”

Hao Hong, chief strate­gist of Bank of Com­mu­ni­ca­tions In­ter­na­tional in Hong Kong, begs to dif­fer with Gross. “Gross is not right,” Hong said flatly. “The Chi­nese mar­ket has gone up sub­stan­tially this year but just be­cause it’s risen too high, too fast doesn’t mean it has to crash down.”

It is cru­cial to un­der­stand the mag­ni­tude of China’s sud­den spike in mar­ket cap­i­tal­i­sa­tion. China’s Shang­hai Stock Ex­change is now the third-largest ex­change in the world. In con­trast, com­pa­nies with a pri­mary list­ing in the US are val­ued at a to­tal of $25 trln, mak­ing Amer­ica’s New York Stock Ex­change, and Nas­daq Ex­change the world’s top two largest ex­changes.

With a wave of voices now zon­ing in to what’s hap­pen­ing in China, it’s im­por­tant to un­der­stand what is caus­ing this op­ti­mism, and who is buy­ing up Chi­nese stocks at this in­sane pace. David Wer­time, a Se­nior Editor for For­eign Pol­icy Mag­a­zine, be­lieves the rally can be at­trib­uted to the Chi­nese media, and that the re­cent rush of in­vest­ments into Chi­nese stocks is com­ing from in­vestors within China it­self. Wer­time writes: “The latest bull mar­ket be­gan with the co­op­er­a­tion of China’s mas­sive, state-con­trolled media ap­pa­ra­tus.”

Wer­time’s as­sess­ment is sup­ported by the most re­cent data from EPFR Global, which re­ports that, in the sec­ond week of June, for­eign funds sold off $6.8 bln of Chi­nese as­sets. It ap­pears that a group of in­ter­na­tional traders took Bill Gross’ ad­vice to heart, and folded their cards, fear­ing that the trend was over.

De­spite these new de­vel­op­ments, there is still no short­age of an­a­lysts con­tin­u­ing to ride out the trend. Uwe Parpart, Head of Re­search at Re­ori­ent Fi­nan­cial Mar­kets, has said: “We went over to pay a visit to the [Shang­hai] stock ex­change a few days ago. If you take a look at what these com­pa­nies are, a lot of them are well founded, do­ing a good job.”

One thing that’s for sure is that China’s mid­dle-class is grow­ing. In the month of Fe­bru­ary, the Chi­nese cin­ema mar­ket sur­passed the Amer­i­can movie mar­ket for the first time in history. There is ad­e­quate proof that the stan­dard of liv­ing in China is ris­ing, mak­ing it pos­si­ble for the mid­dle-class to en­joy leisurely ac­tiv­i­ties, like trips to the theatre.

In ad­di­tion, be­cause Chi­nese cit­i­zens are get­ting wealth­ier, that also means that they now also have the lux­ury of in­vest­ing in the stock mar­ket. This line of think­ing sup­ports the premise that Chi­nese money rush­ing into Chi­nese stocks is not only about “ir­ra­tional hype.” What we seem to be see­ing is the grad­ual de­vel­op­ment of the world’s sec­ond largest econ­omy.

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