China asserts its will to be a regional and global leader
In their monthly Asian markets’ note, La Française and JK Capital Management highlighted that May was a very interesting month in Asia and particularly in China.
May was a very interesting month in Asia and particularly in China where reforms carry on at an unprecedented pace and announcements of new measures or progress are almost done daily.
While South East Asia is showing some signs of weakness, China is asserting its will to be a regional and global leader with clear goals set out for the year.
A and H May stock performance:
The extraordinary performance we saw in April on the Hong Kong stock market triggered some profit taking, particularly on large caps including those with A/H dual-listings.
However it did not stop a strong flow of buy orders for mainland Chinese A-share mid-caps which tend to be more retail-driven.
This explains:
– the discrepancy between the Shanghai A share market performance in May (+3.8%) and the Hang Seng China Enterprise Index/MSCI China Index that measure H shares (-2.3% and -3.9% respectively),
– the drop of the A/H premium from 31% at the end of April to 25% at the end of May despite the strong performance of the A share market (since most mid-caps do not have dual-listings),
– the intervention of China’s sovereign fund which decided to cool down retail speculation by selling RMB6.8bn worth of shares in China Commercial Bank and RMB5.4bn worth of shares in ICBC, triggering a 6.5% drop in the Shanghai index on 28th May.
If anything, it confirms that the Chinese authorities remain on the watch and ready to step in as they wish.
The message from Beijing has been very clear over the past few months: The central government wants the equity market to be a steady performer without exuberance, at a time when financial reforms are moving ahead at full speed.
The A share markets:
A strong divergence appeared among Chinese markets highlighting, if need be, the difference in investor base of the Hong Kong H share market and the Shanghai and Shenzhen A share markets.
The institution-driven Hong Kong market drove the MSCI China down by 3.9% in May when the retail-driven Shanghai market saw its Composite index gain 3.8%.
More spectacular was the technology-driven Shenzhen market that saw its Composite index gain a staggering 23.3% ahead of the launch of the Shenzhen-Hong Kong Stock Connect Program which will allow foreign capital free access to certain Shenzhen exchange listed stocks like the Shanghai-Hong Kong Stock Connect did late last year.
Even though it can sometime be described as highly speculative, the Shenzhen Stock Exchange has been regarded as an exemplary multi-level structure for Chinese capital markets, and serves a critical role for small to mid-sized companies to raise capital.
Consisting of:
A main board (480 companies with a total market cap of Rmb9.1tn),
A SME board (749 companies with a total market cap of Rmb11.1tn),
A GEM board (458 companies with a total market cap of Rmb5.9tn)
The Shenzhen exchange is more focused on IT, industrials and consumer discretionary sectors when Shanghai is more focused on financials, industrials and energy companies.
Shenzhen is more focused on smaller private companies rather than large state-owned enterprises, which explains the very high multiples certain companies may be trading at.
As economic data are weak, retail investors tend to favour companies with good growth potential in IT, healthcare, industrial sectors that represent China’s ‘new’ economy that is undergoing economic transformation.
The fact that the Shenzhen SME board and GEM board (ChiNext) bottomed in December 2012 roughly 18 months ahead of the Shanghai main board is perhaps also a reflection of this trend.
Financial reforms:
The IMF announced through its deputy director and head of China Mission that the RMB was no longer undervalued and that the IMF was supporting China’s efforts to see the RMB included in the IMF’s basket of reserve currencies.
It is a major shift that must have annoyed the US Treasury Department.
From 1st July, Hong Kong registered funds will be allowed to be sold in China and China registered funds will be allowed to be sold in Hong Kong, with a total quota of RMB600bn.
It was also reported that individual investors living in six large Chinese cities and with more than RMB1m of assets will soon be allowed to invest overseas without restrictions through a new scheme named QDII2.
It is worth remembering that a similar scheme had been tested in Tianjin in 2007 and quickly stopped because of the strong capital outflow it generated.
This time the Chinese government seems to be ready to accept the consequences of that move.
Regarding the opening up of the Chinese capital markets, the latest rumours tell us that the Shenzhen-Hong Kong Stock Connect is to be announced in the coming weeks. It is said to include 1000 Shenzhen-listed stocks.
Simultaneously, we heard that the total quota under the Shanghai-Hong Kong Stock Connect may be abolished, and that the Stock Connect may be extended to 194 small and mid-cap companies listed in Hong Kong.
In May, FTSE Russell launched two indices that include A shares and announced that its FTSE Emerging Market index that consists today in 26% of Chinese companies (with no A shares) will gradually swell to 50% (when A shares are fully integrated).
This may have major repercussions for certain ETFs. Our readers may indeed remember that Vanguard, the largest ETF issuer in the world, switched from tracking MSCI to FTSE (now FTSE Russell) emerging market indices back in 2013.
The move made by FTSE Russell may also accelerate decisions at MSCI which is scheduled to make an announcement in this regard on 9th June.
In May, we also learned that Deutsche Boerse and the Shanghai Stock Exchange were in the process of setting up a joint venture to allow 10 Chinese benchmark products to be sold in RMB through the German stock exchange trading platform.
