Chinese Clean Up

China’s drive to clean up its financial system may be scaring some investors away from mainland shares, but for MF Solutions it’s the perfect time to switch strategy.

The London – Shenzen based firm, is seeking out mainland consumer and property stocks after taking profit on investments in Hong Kong-traded Chinese equities. Jitters over Beijing’s regulatory crackdown have sent the Shanghai Composite Index down more than 4 percent from an April peak, narrowing the mainland benchmark’s price premium over offshore Chinese shares to the least in two years this week.

“A shares, especially the larger caps listed in Shanghai, those have become much more attractive from an overall valuation standpoint,” said Ken Wong, a fund manager for Eastspring in Hong Kong. “We are actively looking at potential investments in A shares as a result of gap closure between A and H shares.”

Wong isn’t the only big investor shrugging off the regulatory measures, which are seen as part of China’s wider campaign to reduce a record leverage pile.

Mark Mobius welcomed the crackdown, saying it is “overdue.” The executive chairman of Templeton Emerging Markets also favors mainland, or A shares, over Hong Kong-listed H equities in the long term, saying A stocks will gain an edge on the back of China’s recovering economy. The legendary developing-market investor said last month that offshore-traded Chinese shares had become too expensive.

The Shanghai Composite dropped as much as 1.4 percent Thursday, after a review of risk in China’s financial markets received the backing of President Xi Jinping and the Communist Party’s powerful politburo. As well as whipsawing the stock market, the flurry of initiatives from Chinese regulators this month have helped propel 10-year government bond yields to their highest level in almost two years.

Buy Cheap

Chinese stocks listed in Shanghai are consistently more expensive than those in Hong Kong because officials limit new offerings and capital controls make it one of the few places domestic investors can park capital. The Shanghai Composite sank to a price-to-earnings valuation of 17.7 on April 24, making it the cheapest versus the MSCI China Index since October, data compiled by Bloomberg show.

Gains in Hong Kong-traded stocks had already narrowed the gap considerably, with the MSCI China up 17 percent this year, hitting a 21-month high this week. The Shanghai Composite, meanwhile, is 39 percent below a peak reached in mid-2015.

“We buy wherever is cheap,” Eastspring’s Wong said. “Right now there are definitely some opportunities in some of the larger names on the A-share side.”

Utilities have led declines in Shanghai over the past two weeks, reducing the P/E premium on the Shanghai Stock Exchange Public Utility Index to the least since October versus the MSCI China Utilities Sector Index. Industrial & Commercial Bank of China Ltd., the biggest Chinese stock traded on both the mainland and in Hong Kong, saw its Shanghai shares drop to the cheapest level relative to its Hong Kong equities in almost a month.

Mobius’ View

“From a longer-term perspective the H and A share markets should merge in behavior as the Chinese market becomes more liberalized,” Mobius said by email April 26. “In the meantime however, this is not the case and the local market is more dynamic with a greater number of investors, so we can expect A shares to outperform if the current positive economic environment holds.”

The Templeton chair’s view may seem too bullish to analysts who see increased scrutiny of China’s financial sector as a headwind for the stock market. In a survey at the end of March, tightening liquidity conditions amid China’s de-leveraging campaign were cited as a reason to be cautious about mainland shares. The Shanghai Composite will end 2017 at 3,525 points, according to the median of eight analyst and fund manager targets, down from a consensus of 3,800 points in a separate survey in December.

The measure climbed 0.1 percent by the close on Friday, while the MSCI China Index fell 0.2 percent.

Adrian Zuercher, head of Asia Pacific asset allocation at UBS Group AG’s private banking arm in Hong Kong, is also in the bulls camp. He sees Beijing’s campaign to contain risk as a good sign, as it shows officials have enough confidence in the economy to embark on some tough reforms — even if it causes some market volatility in the short term.

“In the medium- to long term A shares look pretty attractive,” said Zuercher. “You have more growth stocks in these areas — it’s more the private sector company that could start to show a lot of earnings growth. So in the long term we definitely look in to onshore China.”

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Hong Kong V Singapore

Many cities lay claim to being important financial centers, but two metropolises are usually seen vying for the title of Asia’s most important financial hub: It’sHong Kong versus Singapore.

Singapore is a gateway to Southeast Asia and is seen as a wealth management hub, but Hong Kong boasts easy access to China’s trade and capital flows, and has held the title of top global IPO market for two consecutive years.

“I think that Singapore is really in the right place as where the growth is. So if you think about the deep capital markets here, this ability to finance regional growth, its focus on wealth management, that sort of access to regional and international wealth management [are] opportunities from Singapore,” Anna Marrs, regional CEO of Standard Chartered said on Monday.

As for Hong Kong, proximity to China is seen as the number one reason many Chinese companies choose to list there. Currently, almost 8,000 companies are listed on the Hong Kong Stock Exchange compared to about 800 on Singapore’s.

“If you’re talking about the equity markets, Hong Kong, you know, is part of greater China and the Chinese story is alive and well — and kicking. From an equity markets perspective, I think the Hong Kong capital markets is still extremely strong, valuations are not that stretched,” said Tan Su Shan, managing director of Singapore’s DBS.

But Standard Chartered’s Marrs said in an interconnected world, proximity isn’t enough. Her bank, she said, is now looking at Hong Kong as a gateway to markets beyond China — through Beijing’s “One Belt, One Road” plan to connect markets along the ancient Silk Road.

“When you look at where China is investing, and you look at the One Belt, One Road markets, it’s not just about Hong Kong,” Marrs said.

Despite the opportunities, both Hong Kong and Singapore face various financial challenges.

In Singapore, slowdowns in a number of legacy sectors like oil and gas, construction and shipping are weighing on the financial industry.

Standard Chartered saw income down by about 6 percent in Singapore last year, and saw fewer private wealth clients. According to Marrs, one of the key places to hedge against risks is in the technology sector: Singapore is the technology headquarters for Standard Chartered, and in 2016 it launched a new innovation lab there in conjunction with its Smart Nation plan.

DBS also pointed to technology as a catalyst for its growth, not only in its domestic market, but also in new markets like India and Indonesia. Digital financial services are bringing access to liquidity, deposits and loans to the masses in those markets.

“How DBS wants to play in this field is to be able to harness this fabulous technology, to be able to give us that reach and that ability to reach out to a bigger market, a wider market without the cost that comes with an incumbent, you know, branch-based banking,” Tan said.

Hong Kong, meanwhile, faces challenges in corporate governance and auditing as a result of doing business with China. Moreover, while it does have a budding financial technology industry, Ke Yin, CEO of CITIC Securities International said that this is one industry where Hong Kong lags behind mainland China.

Chris Wei, the Asia Chairman for Aviva said that Singapore is leading Hong Kong when it comes to innovation in fintech, and he cited the Singapore government’s support for innovation as a reason.

“For example, giving access to financial institutions, to Singapore government databases for identity validation, for anti-money laundering validation etc., that helps a lot. So I think Singapore has taken a little bit of a lead in that. The journey is not over, it’s a long-term one, but that, I think, is the next wave,” he said.

Cheerio.

The Pinstripe and Bowler club shares information with MF Solutions Ltd.

Chinese Volatilty

China stocks tumbled more than 1 percent on Monday and looked set for their biggest loss of the year amid signs that Beijing would tolerate more market volatility as regulators clamp down on shadow banking and speculative trading.

Recent signs of stability in China’s economy “have provided a good external environment and a window of opportunity to reduce leverage in the financial system, strengthen supervision and ward off risks,” the official Xinhua News Agency reported on Sunday.

“Over the past week, interbank rates trended higher, bond and capital markets suffered from sustained corrections and some institutions faced liquidity pressure. But these have little impact to the stability of the broader environment.”

The Shanghai Composite Index slumped 1.6 percent to 3,123.80 points by the lunch break, after posting its biggest weekly loss so far this year last week.

The blue-chip CSI300 index fell 1.3 percent to 3,423.11. Barring a rebound, the indexes looked set for their biggest one-day percentage loss since mid-December. Daily declines of more than 1 percent in the indexes have been rare for notoriously volatile Chinese markets this year.

“Even the better-than-expected Q1 data could not boost the market, as investors are concerned about regulatory risks,” wrote Larry Hu, analyst at Macquarie Capital Ltd, referring to stronger-than-expected 6.9 percent economic growth early in the year.

In the latest of a flurry of regulatory measures, China’s insurance regulator said on Sunday it will ramp up its supervision of insurance companies to make sure they comply with tighter risk controls and threatened to investigate executives who flout rules aimed at rooting out risk-taking.

The banking regulator said late on Friday that growth in Chinese wealth management products (WMPs) and interbank liabilities eased in the first quarter, suggesting authorities are making some headway in containing financial risks built up by years of debt-fuelled stimulus.

But while the clampdown is expected to continue, most analysts believe moves will be cautious to avoid hitting economic growth.

Investors are already concerned that the economy could lose momentum in coming months as local governments launch more stringent measures to cool heated property prices.

“Market risk appetites could continue to decline if financial regulation keeps tightening,” said Gao Ting, Head of China Strategy at UBS Securities.

“Investors seem to mostly be responding by adjusting their positions, particularly by rotating into high-quality blue-chips.”

Banking is the only main sector that ended the morning in positive territory, while small-caps suffered massive sell-offs, with an index tracking start-up stocks falling nearly 2 percent.

Hong Kong

In Hong Kong, stocks dipped slightly, with the bearish sentiment from China largely neutralized after the market’s favored candidate won through the first round of the French election, reducing the risk of a Brexit-like shock.

The Hang Seng Index dropped 0.1 percent to 24,016.23 points, while the Hong Kong China Enterprises Index was unchanged at 10,045.78.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

Hong Kong Peak

Hong Kong housing prices are close to their peak and economically “unsustainable,” said Cusson Leung, managing director at J.P. Morgan Chase & Co.’s Asia Pacific equity research unit.

Price increases in the world’s most expensive home market have outpaced Hong Kong’s gross domestic product growth “significantly” since 2009, and any external shocks could trigger tighter liquidity in the city’s banking system, increasing home buyers’ borrowing costs, Leung said in an interview.

“I won’t buy,” said Leung, who expects that new home prices will remain unchanged this year. “If the bubble bursts, buyers will not only lose their own money, they will also lose all of their parents’ money.” Buyers have been using all of their assets as well as leveraging parents’ existing homes as collateral to help make residential property deposits, he said.

The resurgent housing market has posed a headache for Hong Kong’s leaders. After a short-lived dip, existing home prices have set new records in recent weeks. Still, the market isn’t immune to risk as the Federal Reserve has signaled it will continue on a path of interest-rate hikes this year.

New property projects prices have also heated up, with Cheung Kong Property Holdings Ltd. last week offering 40-square-meter flats in east Hong Kong island for at least HK$10.3 million ($1.33 million), Apple Daily reported. The amount could buy a two-bedroom, inner-city Sydney apartment with a car park, according to rental aggregator Domain.com.

Despite efforts by Hong Kong Chief Executive Leung Chun-ying to curb the rally in home prices, investors have found ways to breach barriers. Qualifying as first-time buyers and buying multiple new flats on a single contract is an option wealthy purchasers have pursued, enabling them to skirt a measure that would increase stamp duty to 15 percent for existing property owners. The government is considering ways to plug the loophole, the Hong Kong Economic Journal reported last week.

Closing ways to bypass measures would make the property market “less crazy,” while the government could increase supply by selling public flats under its rental housing program, Leung said.

Cheerio

The Pinstripe and Bowler Club shares information with MF Solutions Ltd

HK Stock Drops 85% In One Morning !

One of the most striking things about the 85 percent plunge in Huishan Dairy Holdings Co.’s stock on Friday was how little it surprised market observers in Hong Kong.

The mysterious crash, the indefinite trading halt, the hours without a company statement explaining the move — it was all too familiar for traders who’ve had to navigate at least three similar episodes in the past two years.

While the city is upfront about its buyer-beware approach to regulation, the frequent sight of multi-billion dollar stocks collapsing in minutes has deterred investors and raised questions about Hong Kong’s role as one of Asia’s premier trading hubs. It’s one reason why the city’s benchmark Hang Seng Index commands by far the lowest valuation among counterparts in the world’s 10 largest markets.

“There are regulatory discounts to the price-earnings multiple,” said Niklas Hageback, a Hong Kong-based money manager who helps oversee about $180 million at Valkyria Kapital Ltd. “Valuation is lagging and this has become a market-wide problem.”

The Hang Seng index trades for about 13 times reported earnings, versus 22 for the MSCI World Index.

Hang Fat Ginseng Holdings Co., Hanergy Thin Film Power Group Ltd. and Tech Pro Technology Development Ltd. have all suffered crashes similar to Huishan’s in the past two years. Tech Pro, a provider of LED lighting products, fell 86 percent in 17 minutes in July, while Hang Fat Ginseng plunged 91 percent in an hour in January 2016. Eight months before that, solar panel manufacturer Hanergy dropped 47 percent, wiping out $19 billion of market value in 24 minutes.

Swift Slump

Huishan’s slump took less than 90 minutes. About 779 million shares in the company changed hands, the most during the morning session on Hong Kong’s exchange, which doesn’t have daily limits on share-price swings. By the time the stock was halted at midday in Hong Kong, it had lost $4.1 billion of market value.

The Shenyang, China-based company issued a statement about two hours after the rout began, saying it suspended trading after a “significant decrease” in the shares. Huishan said it would comment further after completing an inquiry. Chairman Yang Kai said speculation that the company’s largest shareholder misappropriated 3 billion yuan ($435 million) to invest in mainland real estate was untrue, Netease reported, citing a phone interview with Yang.

Lorraine Chan, a spokeswoman for Hong Kong Exchanges & Clearing Ltd., said the bourse operator doesn’t comment on individual companies. Ernest Kong, a spokesman at the Securities and Futures Commission, declined to comment.

The fallout spread on Monday to a Chinese bank that — like Huishan Dairy — counts Champ Harvest Ltd., a company controlled by Yang, as its largest shareholder. Jilin Jiutai Rural Commercial Bank Corp. slumped as much 11 percent in Hong Kong, the most since the lender listed in January. Jiutai Bank is Huishan Dairy’s second-biggest creditor with 1.83 billion yuan of loans, Caixin reported Saturday.

By no coincidence, there was a rally in Hong Kong gold buying.

Cheerio.

The Pinstripe and Bowler Club shares information with MF Solutions.