I'm Slowly Rebuilding My Chinese Position 35 comments
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I have to say, I am quite thrilled with the timing of my decision to get the heck out of (Chinese) dodge on July 24th; if you nail something within a week in the markets, that precision is Goldman Sachs-like but without the ability to move the markets after making a call. [Jul 24, 2009: Bookkeeping - Selling China Exposure as Chinese Run In] This was the chart then and frankly there were zero reasons to sell from a technical analysis point of view, but I laid out my case, as repeated below.
I am still waiting for the Shanghai index chart to be updated with overnight data on stockcharts, but to make a long story short, we saw 2 things happening in late July that actually marked a top in China in 2007...
So now we have had in the past week nearly half a million new Chinese brokerage accounts opened... and the largest global IPO since Visa (V) almost 18 months ago.
The retail brokerage accounts exploding is now almost a universally-seen situation regardless of country - a great contrarian indicator. In fact that week, half a million new accounts were opened, and the following week, over 600,000 were opened, bringing the 3 week total to 1.5 million new speculators into the Chinese stock market.
And trust me, institutions are humans too with the same lemming-like chasing behavior... at the time we wrote
Funds investing in the so-called BRIC nations of Brazil, China, India and Russia added $2.1 billion for an 18th straight week of gains, EFPR said. China funds posted the largest gains, adding $243 million, while Indian funds attracted $148 million.
Shanghai was rich at the time...
Shanghai overall is now at 36x earnings
Still, the rally has made Chinese stocks the most expensive since January 2008, Bloomberg data shows. At the peak in October 2007, the benchmark index traded at 48.7 times profit,
... still it is not cheap but certainly a 25% haircut is a good place to start. Also keep in mind, if you are new to that market, it trades in a parallel universe unto itself.
our really long-time readers will know the Chinese market is "closed" (i.e. no shorting, no foreign money) so its a bit of a parallel universe. [Oct 13, 2007: Shanghai - the Mystical Land of Premium Valuations] The same stocks that trade in Hong Kong are traded many times for 50-100%+ higher valuations in Shanghai. (well back in late 2007 it was more like 150% higher - its since "cooled down" hah)
Jim Rogers agreed with our view:
I don’t like buying when things are going straight up and China has been going straight up for nine months,” Jim Rogers, chairman of Rogers Holdings and the author of books including “Investment Biker” and “Adventure Capitalist,” said in a Bloomberg Television interview in Singapore today. The nation’s stock market may have “gotten ahead of itself,” he said.
The closest parallel to Shanghai is Hong Kong; as many shares trade on both markets as this market finally broke a support level overnight.
That said, I exited just about all of my Morgan Stanley China A Share Fund (CAF) on the 24th, noting I am a big fan of China and greater Asia for the long run, but it was all starting to get frothy at the time, so I wanted out.
Much like Jim I'm a 10-20 year bull on China. The next 10-20 days? Taking the safer route.
Now let me be clear, China could turn around and begin a new rally tomorrow - or drop another 50% from here. But unlike the majority of invesors nowadays who buy high and sell higher, I do like it when things get cheaper. I sold CAF just under $37 at the time, and now it has dropped to $30 - so I can get part of my position back at nearly a quarter off.
CAF chart when I sold - (I'll explain why it looks so different than the Shanghai index chart via July below)
CAF now...
The chart is putrid, but since this part of a long-term incremental purchase, I am going to start to rebuild this position slowly. It is obviously not a purchase on technical reasons. My hope is China drops much more from here, and I'll try to buy 20% partial positions along the way down. I'd like to buy around $27-$28 with the next batch. I could see that Hong Kong ETF dropping to $13 which would imply more downside to come for China as well...
For today, we simply are taking the position back up to about a 1% allocation. CAF has another variable going for it (which is why it lagged the Shanghai index so badly earlier this summer) in that it is a closed end fund which trades at a premium or discount to NAV. It had traded at a discount to NAV for much of 2007 and first half of 2008, whereas this spring it traded as high as a 33% premium to NAV. That is a huge swing and impacts the fund substantially; the current premium is about 3% after turning negative in July. So it's in the middle of the range - the perfect scenario to buy more is for both the Shanghai index is to fall, and the fund to trade at a 10 to 20% discount to NAV; so we have to keep an eye on both situations with such a vehicle.
Long Morgan Stanley China A Share Fund in fund; no personal position
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One suggestion: "the closest thing to China" i.e. Shanghai is probably not Hong Kong (EWH), but mainland shares traded in Hong Kong ($HSCEI). FWIW, the latter index is clinging tightly to support, right on the 50-DMA line and just 9.3% below the year's high.
Wenzhou people is famous for their extreme entreprenuering ways. They migrated to every corner of the world. They speculated in flocks in anything that can make quick profits. Wenzhou broke loose from communism as soon as China decided to "reform and open-up" in late 1970s. They were the earliest success stories in China outside the 'special economic zones' without the benefits of favarable policies.
Wenzhou women engaaged in business activities as much as men. In fact usually a whole extended family throw themselve completely into a business in order to get an edge toward success.
There was a time when "the Wenzhou model" was widely studied and (attempted to) emulated in China. But Wenzhou's unique culture is difficult to emulate even in China. These days they are watched over because of their extremely speculative ways can be a problem.
On Sep 01 12:50 PM doubleshortetf wrote:
> Hmmm,
>
> Wenzhou is the "shoes" capital of the world so one might think the
> housewives might hoard leathers or future contracts in rubber. But
> speculating in all too volatile metals they have zero clue about?
>
>
> This sentence from the Reuters article captured the unfair game the
> Chinese CCP and SOEs resort to:
>
> "It's like the father suddenly told the creditors of his debt-ridden
> son that his son won't pay any of his debt," said a lawyer from the
> derivatives risks committee of the Beijing Lawyers Association.<br/>
>
> www.reuters.com/articl...
>
> Pig farmers in Guangzhou province were buying copper or nickel, Liu
> wrote, citing CCTV. Residents in Wenzhou city of Zhejiang province,
> “famously investment savvy,” are reportedly using bank loans to stockpile
> copper scrap, with one merchant saying he has stored 20,000 tons...
> Housewives in Wenzhou may have stockpiled metals as “they just have
> too much cash on hand
On Sep 01 02:14 PM Alan Young wrote:
> Good work, Mark, and a fine article overall.
>
> One suggestion: "the closest thing to China" i.e. Shanghai is probably
> not Hong Kong (seekingalpha.com/symbo...), but mainland
> shares traded in Hong Kong ($HSCEI). FWIW, the latter index is clinging
> tightly to support, right on the 50-DMA line and just 9.3% below
> the year's high.
When the "I am pounding the table on China" article at 1750 comes out in 3 months, then we have a difference in option. ;)
On Sep 01 01:51 PM Joseph L. Shaefer wrote:
> Well, Mark, differences in opinion are what makes stock markets and
> sports betting interesting.
>
> For all the reasons I've expressed in recent articles, we disagree
> on this one so, if you wonder at the sudden liquidity and availability
> when making your new purchases of Chinese stocks, I'm the short-seller
> on the other side of the trade. At what I believe will be lower
> prices yet, I'll add to your buying fuel when I cover these positions...
Back to Bloomberg stories on ordinary folks speculating in the metals portend greater bubble than the last bubble from pre Beijing Olympic bubble a year ago.
On Sep 01 02:56 PM HaavBline wrote:
> Well. You claimed to have been to China 30 times and you only know
> Wenshou as the Shoe capital of the world? Seriously doubt your
> claim.
>
> Wenzhou people is famous for their extreme entreprenuering ways.
> They migrated to every corner of the world. They speculated in flocks
> in anything that can make quick profits. Wenzhou broke loose from
> communism as soon as China decided to "reform and open-up" in late
> 1970s. They were the earliest success stories in China outside the
> 'special economic zones' without the benefits of favarable policies.
>
>
> Wenzhou women engaaged in business activities as much as men. In
> fact usually a whole extended family throw themselve completely into
> a business in order to get an edge toward success.
>
> There was a time when "the Wenzhou model" was widely studied and
> (attempted to) emulated in China. But Wenzhou's unique culture is
> difficult to emulate even in China. These days they are watched
> over because of their extremely speculative ways can be a problem.
>
>
>
Yes, I believe China will experience historic GDP growth, that the ability of communist China to get capitalism right is greater than that of the US, and that the US GDP will not just stand still, but shrink.
However; the greatest challenge in investing in China is credible information. Following Jim Rogers very carefully.
www.time.com/time/worl...
Here is another dose of reality by Chinese people fondness and penchant for gambling:
"the Shanghai and Shenzhen exchanges are dominated by retail investors driven to frenzy by speculation and sentiment. "
Yet just the kind a market I want to go long now...
Oh well, good thing i'm not sensitive
On Sep 01 01:25 PM TraderMark wrote:
> p.s. not sure why you got 2 negative thumbs up. You didnt pump iamned.com
> did you?? ;)
I am just waiting for them to hire you as full time staff writer!
On Sep 01 04:41 PM Zachary Scheidt wrote:
> I hear they've got some great research reports for slow market days
> :-)
>
> Oh well, good thing i'm not sensitive
Short FXI or CAF is way better.
agree with your call here. China stocks are high beta, emotionally intense and need a heavy dose of government policy analysis, best done here in China.
Despite the 20% drop, the fundamentals are still in place to head higher. However, the leadership have changed from asset heavy financials and RE builders to productive enterprises benefiting from economic recovery and government stimulus, as it takes a little lag for real economy to catch up to virtual world of financial markets.
Also, there are multiple strategies to profit from. Many components in the shanghai index are instruments of state economic policy. One can literally predict which companies will be deployed in a particular set of policy...
China would have to triple the size of its economy - and the US would have to stand still - if China were to pull even with the US in GDP.
Consider the following numbers, culled from official Chinese statistics:
1. About 65 million Chinese people live in households with more than $20,000 a year in income.
2. Around 165 million make between $2,000 and $20,000 a year.
3. About 400 million Chinese have household incomes between $1,000 and $2,000 a year.
4. About 670 million have household incomes of less than $1,000 a year.
As you see China is a land of extraordinary poverty.
And some dreamers to think that China can pull US and the world out of financial rut...
So with even 30 trips to China. you remained exposed to only a small part of China which actually has been relatively stagnant (by Chinese standards) in this decade.
Shoe people in Dongguan, meanwhile, are more likely to be Taiwanese or Overseas Chinese businessman doing brand name shoes. Whereas a Wenshou shoe guy is more likely to be local, doing no-name shoes. But they are not afraid to venture into dangerous places across the world to sell their wares
On Sep 01 03:26 PM doubleshortetf wrote:
> I'm in the electronics and pharma industries and spent most of my
> time in Pearl River Delta from ZH to GZ to DG to SZ. Met few shoes
> guys in the KTVs in DG and these guys preferred doing business in
> DG than WZ.
>
> Back to Bloomberg stories on ordinary folks speculating in the metals
> portend greater bubble than the last bubble from pre Beijing Olympic
> bubble a year ago.
>
> On Sep 01 02:56 PM HaavBline wrote:
China has a track record of world leading economic growth and this will continue in the forseeable future. For long-side investore or traders, it makes perfect sense to invest in China and/or trade China markets.
For investors, China will outpeerform in the long term. For long-side traders, you want to trade a volatile market with a long term up trend which improves your chance of success. Shanghai A share is probably the best volatile, inefficient, but robust market for traders.
CAF tracks the volatility of Shanghai A shares, as a close-end fund, its premium/discount from NAV also fluctuate accroidng to market emotions. This makes it a better trading vehicle for good market timers to outperform the Chinese market. So by choosing CAF as a long trade vehicle, you will have better chance of successful trade.
I use FXI as my Asian core holdings to ride China's long term growth, buying when prices are right and rarely sells. I use CAF as trading vehicle the same way tradermark suggest, to catch the extra potential gain of the volatile, inefficient Shanghai A share market.
When I feel like hedging my Asian investments, I use EWJ as my heding choice. Shorting EWJ makes sense because Japan is trapped in a long term bear market. Even as there is finally a regime change in Japan, the down trend remains until the new governing party proves they can indeed turns things around.
Regardless of the way how the judges are appointed and how corrupt they could be as far as I'm concerned the majority of them are law school graduates and this practice is common in Continental Law tradition countries like France or Japan. It’s not unusual lots of them have doctoral degrees even from some Ivy universities.
I have no interest to defend the current Chinese political system at all. But waging a scary campaign from a China expert is pretty hilarious particularly when it comes to the stock performance. Statistics from China maybe distorted to whatever the extend they want but can figures from US Treasury in regards to Chinese holding of US bonds be skewed as well?
As a fledging market economy it’s abnormal not to have some concerning issues but those issues should be looked deeper and be put into wider context!
On Sep 01 12:20 PM doubleshortetf wrote:
> Been to China over 30 times since 1998 while working for 3 multinationals.
> It's amusing to see "experts" who has not been to China or spent
> few days in the big Chinese cities recommending Chinese stocks...
> Wonder if they ever spent weeks at a time in gritty factory towns
> or poor interior areas...
>
> And Xie is right - Chinese market is indeed a ponzi scheme and gambling
> den where the "house" is CCP (Chinese Communist Party).
>
> Some sober facts:
>
> 1. China is a communist country ruled by 1 party with iron grip.
> CCP party bosses appoint the national/regional/local politicians
> and many private company managements since many private companies
> are ex-SOE (state owned enterprises).
>
> 2. Corruption in China is prevalent, rampant and one of the worst
> even down to lower ranking employees. For example, factory canteen
> worker receives an "envelopes" in scheme where he claims he received
> 10 bags of rice when only 8 bags are delivered.
>
> 3. There is almost no "law" since laws are written to support the
> communist party or corrupt local communist bosses. Judges are appointed
> by the local communist boss and few if any understand law. Many judges
> got job thru "guanxi" or connection and of course bribes.
>
> 4. The Chinese banks in are BIG TROUBLE. E&Y got in heaps of
> trouble for discussing hidden bad and noncollectable debts. Local
> communist cadres dictate banks to lend to their pet projects and
> of course friends who bribe them not to mention COMPLETE lack of
> transparency.
>
> 5. No one except pea size brains trusts the communist government's
> statistics which are MANIPULATED.
>
> 6. Many of the listed companies numbers are COOKED. Auditors and
> their management can be bribed and extorted. It's beyond me how anyone
> would trust Chinese companies' financials unless audited by Big 4.
> And even Big 4s audited numbers are suspect since most Chinese companies
> carry multiple books including one for taxation and another with
> slush funds and hidden losses.
>
> 7. Latest Chinese share and commodity appreciation have lot to do
> with communists pumping money to the economy by directing the banks
> to lend. This kind of stimulus cannot go on.
>
> Now is good time to buy FXP when all the investment gurus in unison
> are recommending Chinese stocks and even "taxi drivers" and clueless
> herd investors believe China with 1/3 US GDP will save the world.
You are a real prick on this message board. You think you really know China, huh? I see that you've been resorting to unwarranted personal attacks against other people on SA like doubleshort and another fellow Tony who is in finance and lives in China.
No surprise really with any insecure chump hiding behind a PC with a picture of grumpy baby that you are.
Loosen up and act like an adult.
I never claimed to 'really know China'. But I do see a lot of people who knows LITTLE about China making silly comments as if they are real experts. I am merely pointing out the holes in their story. It is up to you to judge by yourself.
What's the point of an internet forum if everybody just cheers on blindly and swallowed whole the junk written by whoever on a whim?
On Sep 02 12:10 PM Persian wrote:
> Haavbline,
>
> You are a real prick on this message board. You think you really
> know China, huh? I see that you've been resorting to unwarranted
> personal attacks against other people on SA like doubleshort and
> another fellow Tony who is in finance and lives in China.
>
> No surprise really with any insecure chump hiding behind a PC with
> a picture of grumpy baby that you are.
>
> Loosen up and act like an adult.
His diatribes remind me historically of what "smart" European investors were saying about the emerging market known as the United States in the late 19th century.
How well did NOT buying the United States work out for those "smart" investors?
On Sep 01 11:12 PM doubleshortetf wrote:
> Some sober data on China for investors fascinated with China - 3rd
> world country ruled by 1 party AKA communist. Similar to the adoration
> US had for Japan 20 yrs ago right before the mother of all Japanese
> bear markets starting in 1989.
>
> China would have to triple the size of its economy - and the US would
> have to stand still - if China were to pull even with the US in GDP.
>
>
> Consider the following numbers, culled from official Chinese statistics:
>
>
> 1. About 65 million Chinese people live in households with more than
> $20,000 a year in income.
> 2. Around 165 million make between $2,000 and $20,000 a year.
> 3. About 400 million Chinese have household ­incomes between
> $1,000 and $2,000 a year.
> 4. About 670 million have household incomes of less than $1,000 a
> year.
>
> As you see China is a land of extra­ordinary poverty.
>
> And some dreamers to think that China can pull US and the world out
> of financial rut...