China stocks: Taking the long view

Chinese stocks nosedived Tuesday on a weakening yuan. The Shanghai Stock Exchange Composite Index sank 6.2% to 3,746 overnight, and the Shenzhen Stock Exchange Composite Index plunged 6.6% to 2,174. The small cap barometer, the Chinext Price Index tumbled 6.1% to 2,504, and Hong Kong’s Hang Seng Index fell 1.4% to 23,475.

Asia Unhedged, needless to say, is keeping its binoculars trained on the horizon where China’s markets are concerned. We’re not alone in that view.

Sticking with Chinese shares could prove “very lucrative” because the country’s economic growth is still stronger than many of its peers, Gerry Alfonso, a sales trader at Shenwan Hongyuan Group in Shanghai told Bloomberg. “This lack of a clear trend in the market causes overreactions by investors. Eventually the market will turn around.”

Meanwhile, the Chinese real estate market appears to be picking up, reflecting that some of the hot money from stocks in flowing into hard assets. Home prices rose 0.17% in July from the previous month, the third consecutive increase data showed on Tuesday.

On the downside, many investors still fear that the Chinese government may allow its currency to weaken further against the dollar at the same time it lessens its support for policies to uphold the stock market.

This has led the so-called smart money to get out of the market. The wealthiest investors in China’s equity markets are dumping their shares, according to the nation’s clearing agency.

The number of accounts with more than 10 million yuan ($1.6 million) of shares shrank from 76,000 in June to 55,000 in July, a 28% drop, and those with between 1 million yuan and 10 million yuan declined by 22%, according to data compiled by the China Securities Depository and Clearing Corp. Meanwhile accounts with less than 100,000 yuan rose by 8%.

With Chinese stocks holding some of the richest valuations in the world, but posting weak corporate earnings, China’s rich are taking advantage of government agencies buying shares and cashing out of their positions, CLSA, Asia’s longest running independent brokerage, told Bloomberg.

“The high net worth clients are the ones who moved the market,” Francis Cheung, the head of China and Hong Kong strategy at CLSA, wrote in email, according to Bloomberg. “They tend to be more savvy … And there is not a lot of fundamental support for the A-share market.”

In the interim, Asia Unhedged thinks many wealthy will be spending their stock proceeds in other ways that benefit China’s economy. These folks will also return to the market when the current crisis blows over.

China Daily reports that sales of motor yachts longer than 24 meters and enrollments at yacht training centers are surging in China. The yachting craze is not confined to the super rich. Middle-class Chinese are joining in. Hmm … not the sign of a country whose economy is about to hit the skids.

 



Categories: Asia Unhedged, China

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