Despite a recent government decision allowing investment in markets outside of the mainland, China’s indexes still continue to close higher, fueling renewed speculation in some quarters that the markets are inflated and ready to pop. But Alec Young, international market strategist at Standard & Poor’s, says American investors should not be too concerned.
While Young thinks the China market may be a bubble and could correct, since Americans cannot currently invest in that market, they are unlikely to be hurt by any sell-off. Furthermore, Young thinks it’s unlikely there will be repeat of what happened in February (when the China plunge caused world markets to swoon). He points out the February sell-off was short-lived and then everything started going up again.
In China earlier today, in what Young termed “a conciliatory gesture” ahead of U.S. Treasury Secretary Hank Paulson’s upcoming visit, the Chinese government increased the amount its currency can fluctuate, raised interest rates, and curbed bank loans yet again in an effort to tame a red hot economy and ease trade tensions with the West.
The latest to characterize the mainland’s stock market valuations as a bubble is the man considered Asia’s richest, who said that prices are likely to decline. “As a Chinese, I’m worried about the stock market in China,” Li Ka-shing, 78, told reporters on Thursday. The chairman of two Hong Kong companies that trade in the city-state, joins China’s central bank governor in saying the mainland’s stock prices are excessive. On Wednesday, China’s Premier Wen Jiabao warned of “problems” for the economy.
S&P Equity Research’s opinion on China’s “A” shares, those that are available only for investment by local investors and qualified institutional foreign investors remains underweight. Representative exchange-traded funds include: iShares MSCI Pacific ex-Japan Index Fund and iShares S&P Global Utilities (JXI NR). Mutual funds concentrated in Asian equities outside of Japan include: Fidelity Southeast Asia (FSEAX) and T-Rowe Price New Asia Fund (PRASX).
Concerned that its markets have overheated, China this week let banks buy shares overseas for the first time ever, diverting some 35 trillion yuan ($4.6 trillion) from the local stock market where trading has surged sevenfold. But the move has done nothing to dampen enthusiasm for Chinese shares.
Commercial banks can invest as much as 50% of funds in the qualified domestic institutional investors program (QDII) in overseas stock markets, the China Banking Regulatory Commission (CRBC) said. Retail investors need at least 300,000 yuan or about $40,000 to buy such financial products and capped at 50% of their total equity portfolio, the regulator said. It’s been widely reported that the growing Chinese middle class have been buying stocks of Chinese companies on margin, pledging their homes as collateral for personal loans, currently valued at about $180 million in Beijing alone.
The Chinese regulator’s action is not a surprise to Standard & Poor’s Equity Strategy, which has been awaiting actions that will help to cool the mainland’s markets. Alec Young, S&P’s international equity strategist, says the move by regulators is welcome since the traditional means of slowing growth (raising interest rates and bank reserve requirements) haven’t worked. “By giving Chinese citizens greater equity investment alternatives, this action may help moderate the pace of the local market’s ascent, making it more sustainable,” he explains.