Foreign buyers look to ride out latest China share troubles
LONDON: Foreigners holding Chinese shares appear largely unworried by the latest dive on domestic markets, with some even looking to pick up bargains if the removal of an emergency stock sale ban unleashes a bigger plunge.
The six-month ban on sales by listed companies’ major shareholders, imposed during the height of a rout last summer , is due expire on Jan. 8. But following this week’s fresh bout of brutal volatility, reports on Wednesday suggested it will be extended.
The uncertainty highlights the tricky nature of the authorities’ task in stabilizing the market.
Three trading sessions into 2016, Shanghai-listed shares have lost $240 billion of their value after a peak-to-trough drop last year of around 45 percent.
Whenever the selling ban is eventually relaxed, it will unlock up to 1.24 trillion yuan ($190 billion) worth of shares, flooding the Chinese bourses with yet more supply.
Many investors hope Beijing will spread the process out but Citi analysts estimate that if the ban is lifted abruptly, this could create 100 billion yuan a month in selling pressure for a while afterwards.
With Beijing’s intentions so difficult to judge, most investors accept that they must keep calm and carry on. “We try not to focus on the share overhang issue,” said Nicholas Yeo, head of Chinese equities at Aberdeen Asset Management. He has made very few changes to his portfolios of China A-shares, which are listed on mainland markets dominated by local investors.
Yeo said the uncertainty can suit the Chinese authorities. “It is all very opaque. There is an advantage in keeping the market guessing. It could even be that they are giving instructions already to the big investors.” he added.
Investors such as Yeo note that while the violent swings of recent days are bad for market confidence, they do not have a huge impact on major global funds’ China strategy. A-share markets largely remain the preserve of small-time local investors who account for 85 percent of daily trade. Foreign investors are estimated to hold only around 2 percent of the total.
Karine Hirn, Hong Kong-based partner for asset manager East Capital, said the removal or retention of the share sale freeze would make little difference to her fund. “People have been positioning with the belief everyone will be selling on Jan 8. (But) even if they extend it, in six months’ time you will have the same problem again,” she said.
“In this time of high volatility, the key thing is to make sure all your holdings are long-term investments. We don’t tend to trade back and forth when you get this kind of market.”
Emerging market veteran Gary Greenberg at Hermes in London said that with so much uncertainty about the Chinese economy, the slump in the value of the yuan currency and the government’s market interventions, it was “difficult to be a China bull”.
Nevertheless, the recent fall in share prices made them more tempting, and if the authorities suddenly ended the selling ban this could provide too good an opportunity to miss.
“If I were them I would allow the selling to take place over an extended time period (9 to 12 months),” Greenberg said. “If Beijing announced the ban on selling was to be lifted and it resulted in a dramatic plunge in share prices, it would represent a buying opportunity we’d take, because the share prices would temporarily be artificially depressed.”
The China market is not for the faint-hearted. A-shares’ annual turnover velocity – the ratio of trade turnover to market capitalization – was 500 percent last year, compared with a 90 percent average across markets in the G20 group of big economies, analysts at Citi calculate.
Margin financing – money borrowed to buy securities and a measure of speculative activity – peaked at 10 percent of the free float of Chinese shares last June, according to asset manager GAM. In markets such as the United States, the figure is below 2 percent.
So foreign funds that have dipped their toes in the murky waters of mainland Chinese shares tend to have a stronger stomach for risk than most.
Their allocations are also usually small enough to allow them to sit it out without too much damage to overall fund performance. Investors also point out that the vast Shanghai and Shenzhen markets contain many good companies whose shares are bought and sold indiscriminately by local punters, regardless of the firms’ business performances.
Wim-Hein Pals, head of emerging equities at Robeco, remains bullish on A-shares, but they make up less than 2 percent of his portfolio. “If there is one market where you have to be selective, it is China A,” he said, adding that less than a 10th of mainland-listed shares had viable business models and reasonable price valuations.
Picking the right stock was also important among H-shares, those of mainland companies mainly listed in Hong Kong.
“We are bullish on the China consumer and services but cautious on the industrial side. That’s how we position both on H- and A-shares,” he said. Pals called the likely effect of the sale ban relaxation “marginal”, saying it could affect less than 1 percent of the tradeable market capitalization.
One motivation is the hope that A-shares will eventually be included in indexes run by global providers such as MSCI, which are the yardstick for funds investing trillions of dollars.