Shanghai for brave at heart
The Australian Financial Review Wednesday 18 March 2009
China access
David Potts
The Shanghai stock exchange has surged well over 20 per cent so far this year.
But it came off a low base after its 65 per cent collapse last year.
China has two main exchanges, as well as two categories of shares. Or three of each if you count Hong Kong.
"A" class shares are the ASX of China: they trade in yuan on the two big mainland exchanges.
But foreigners are locked out without a special licence — which AMP Capital Investors holds — though they can trade “B” shares which are quoted in foreign currencies.
Then there are “H” shares which trade on the Hong Kong stock exchange. Often they are dual-listed, so there’s an equivalent A share trading on Shanghai.
Only the prices aren’t equivalent. The A shares trade at such a premium that a special Hang Seng Index, the AH Premium Index, has been developed to measure the gap or spread..
At their peak early in 2008,A shares traded at more than twice the value of their identical H share listing. The gap narrowed last year, but is still above 60 per cent.
“Shanghai is the third-largest equity market in the world behind the US and Japan,” said Karma Wilson, head of Asian equities at AMP Capital Investors.
The A shares tend to be industrial and consumer staple stocks, compared with Hong Kong's energy and finance orientation.
Wilson says Shanghai’s surge from a low base has been fuelled by high liquidity.
“It’s a temporary burst. We won’t see that rate of recovery continue,” she says.
The only access to the better performing A shares is through AMP’s Capital China Growth Fund which was setup almost 2½ years ago.
Because it is listed it is a closed-end fund and so can’t take new money. More to the point, it can’t suffer redemptions either.
Since there are no new subscriptions you can only buy units through a broker, who will charge commission, and there are no entry or exit fees.
But there’s an annual fee of 1.65 per cent plus a performance fee for beating the S&P/C1TIC 300 index converted to Australian dollars by 20 per cent. It is trading at about a 35 per cent discount to its underlying value.
The fund fell 32.7 per cent in the year to January 3l, although as returned 35.4 per cent since it started in 2006.
One curiosity is the fund may put you in the distribution reinvestment scheme whether you like it or not This is to preserve cash because it is licensed to invest only $US200 million so any additional investments have to come from earnings.
Premium China Fund, launched in 2005, is the largest of the specialist Chinese funds and has a broader brief. It invests in greater China — the mainland, Hong Kong and Taiwan.
The exchange's surge from a low base has been fuelled by high liquidity.
As a result, its portfolio is mostly H shares which, since they trade at a discount to A shares, are a cheaper entry point.
Hong Kong is considered to be better regulated, especially when it comes to corporate governance, with greater liquidity.
The fund charges a 2 per cent management fee and l5 percent of the out performance of the MSCI China Free Index.
Smaller funds include Aberdeen China Opportunities Fund, Challenger China Share Fund and the Fidelity China Fund.
Stimulus puts glimmer of hope on China’s horizon
Although China’s dependence on exports was obvious, the way it fuelled domestic demand tended to be taken for granted
It is noteworthy that nobody is forecasting China’s exports will pickup this year .
That leaves the government’s monetary and fiscal stimulus.
“It’s a huge stimulus but the quality isn’t that great,” says Wingate’s Padowitz.
“There won’t be much bang from the buck though there are a lot of bucks It’s not quality and sustainability but more a case of heavy-handedness.”
Even so, the loosening in lending has prevented a much sharper drop in growth.
This is shown in Hong Kong broker CLSA’s purchasing managers index (PMI), a widely watched leading indicator based on a survey of manufacturers. The index has risen for the third month. It climbed from 40.9 in November to 45.1 in February. But while the freed is going the right way, unfortunately anything below 50 suggests conditions are deteriorating.
“The speed of the collapse suggests that we should not put too much weight upon the mildest of upticks,” Green says.
At most, the evidence suggests manufacturing has stabilised. The latest gloomy report from the World Bank on East Asia suggests it will worsen.
“The share of firms laying off workers has now been stable for four consecutive months," says CLSA Asia-Pacific Markets China macro strategist Andy Rothman. But he adds he believes unemployment will continue to rise.
Although China recorded growth of 6.8 per cent in the December quarter, “the first quarter this year won’t be pretty”, partly for seasonal reasons, says Jonathan Wu, head of distribution and operations at the Premium China Fund. Production shuts down for three weeks over the Chinese new year holiday.
Wu says the government’s infrastructure spending, which is over a two-year period, will kick in from the June quarter. But the days of l2 or l3 percent growth, which pushed commodity prices to record levels, won’t return.
“It’s unsustainable because of the bottlenecks,” Wu says, predicting growth rates between 5 and 8 per cent.
Like Australia’s banks, China’s banks are strong. They are liquid and have a low ratio of loans to deposits. For every dollar of deposits hid in a Chinese bank, that bank has lent only 64¢.
And that is backed by the world’s biggest hoard of foreign exchange reserves that China has accumulated from its trade surplus with the US.
“Everyone else is going through a credit contraction but China’s ability to expand credit is incredible,” says Wu.
Critical to Australia is whether Chinese manufacturers, especially the steel makers, have finished running down their inventories. A speculative inventory build-up toward the end of last year is now being unwound.
Padowitz says: “There has been some drawdown in inventories, which looks like a rebound in demand for iron ore but isn’t”
The country’s ability to expand credit is incredible.
- Jonathan Wu, Premium China Fund
Pervan calls it a false start. Domestic steel prices rose, which, in fact, was speculation on the stimulus package, but resulted in the smaller mills stocking up at the beginning of the year.
But demand didn’t rise and the subsequent supply overhang, causing steel and iron ore prices to go into reverse, will take three to six months to unwind. Also, the latest quarterly survey of large scale companies shows inventories are still higher than normal This suggests inventory run down could be drawn out, either postponing the recovery or keeping it weak.
Credit Suisse is still upbeat on China but even Tao sees limits.
“China will crawl out from the recession ahead of the rest of the world, but a fast reacceleration is unlikely,” he says.
