No Short Term Crisis coming in 2017 in the Chinese Markets

Western Concerns Justified on the Chinese Markets, but no Short Term Crisis coming in 2017.

When the direct trading link between stock markets in Shenzhen and Hong Kong opened last month the international investors ready to take advantage of what was billed as a big opportunity to buy into Chinese equities.

The link offers foreign investors greater access to shares on the Shenzhen stock market, home to some of China’s up comming technology companies. However, flows reached just a fifth of their daily limit on the link’s debut and have failed to match that since.

Judged by the money, international interest in Chinese stocks remains anemic. Yet talk to strategists focused on the country and many think the worlds second-largest capital market could be on the brink of another bull run.

 A lot of international investors still like the China  market . There’s incredible dispersion in this market and a lot of change, whether it is driven by regulation or reform, but also change driven by technology and within that we can find some fantastic opportunities is the overall call on a broad basis.

The skepticism of international investors is understandable. It has been more than a year since Chinese stock markets were synonymous with anything other than headaches. The last big bull market in early 2015 was eye-popping in scale and it caught most fund managers off-guard. The bust that followed was brutal and those whose money was trapped when about half the listed market suspended trading still bear the scars.

Since then, angst about China’s currency policy has triggered two episodes of global market turmoil and concerns about its weakness are growing once more.

Small wonder that Hong Kong-listed Chinese companies still the broadest means of gaining exposure are trading on a soggy 8 times expected earnings, compared with a ratio of 15 times for the MSCI Asia-Pacific.

Yet leading brokerages like Morgan Stanley recently upgraded China to “overweight” for the first time in 18 months, looking for a rally led by earnings growth.

Others have focused on potential misunderstandings by western investors of changes in China.

There is a lot of concern about the financial systemic risk for the whole banking system; the second is the big concern about the property tightening related downside risk this year. And, thirdly, a lot investors and analyst underestimate the China reform process.

The economy’s debt mountain is a long-running concern for China watchers. Overall debt has risen to more than 250 per cent of gross domestic product from about 150 per cent 10 years ago a very high increase.

But the bulls argue this may be peaking and in key areas, beginning to ease.

 I do acknowledge that the overall gearing level is high but I do not believe there is an imminent risk of a short-term crisis, in my opinion.

One of the biggest risks for China, however, may be outside its control namely the action of US president Donald Trump. Mr Trump has threatened to label China a currency manipulator and impose 45 per cent tariffs on Chinese imports.

In my opinion if this danger does play out, which could take more than a percentage point off Chinese growth by some estimates but think the likelihood of Mr Trump making good on his threats is slim since it would hit the US too, raising the prices of everyday items.

This year the Shanghai Composite and its Shenzhen counterpart are down 12 per cent and 15 per cent. Crucially, however, neither has broken below its average valuation of the past five years, implying sentiment this time has not been so thoroughly crushed as it was in the four-year bear market to 2014.

China’s bulls are counting on it and I do not believe there is an imminent risk of a short-term crisis.

_ Farzan Ghadially