Notes From Hong Kong: China's Economy Back in Focus

Includes: EWH, FXI, PGJ
by: L. Desjardins

Some consolidation is expected for the Hang Seng Index but momentum may take the index clearly above the 23000 level this week if New York performs well. The momentum this week may come from China. In Shanghai the uptrend may persist ahead of the Communist Party annual meeting from October 15 to 18. On the agenda will be the adoption of the next 5-year plan which should indicate how far is the party ready to introduce economic reforms to foster the domestic market.

INDICES 1 week 4 weeks YTD
Hang Seng Index 2.6% 7.9% 4.9%
HS China Enterprises 2.8% 7.8% -0.3%
FTSE/Xinhua A50 3.8% 3.3% -22.3%
Shanghai Composite 3.1% 2.8% -16.4%
CSI 300 3.7% 3.8% -14.5%
EWH 2.7% 11.6% 17.2%
FXI 3.0% 8.9% 2.9%
PGJ 1.9% 10.8% 8.0%
Click to enlarge

On Wednesday we will get the trade figures for China. Estimates call for exports growth of 26% compared to 34% in August, nothing to stop the calls for a stronger yuan. On Thursday (New York time), the Conference Board will release its leading indicator index for China. Fears that the Chinese economy may be slowing too fast are gradually being dispelled and China is outshining many developed economies not only by its growth but also by its creditworthiness. On Friday news came out that Moody's Investors Service is reviewing China's government bond rating for a possible upgrade and over the weekend Bloomberg carried a story that, judged on 5-year credit swaps, "China’s bonds are becoming almost as safe as U.S. Treasuries in the market for insuring against defaults."

The Hang Seng Index has risen in 22 out of the past 26 trading sessions for a cumulative gain of 11.7%, as concerns over a double-dip in the global economy have eased, while expectations the Federal Reserve will launch a second round of quantitative easing drove liquidity into equity markets. The Index is now at its highest level since July 2008.

The property sector has been the main driver of this surge of liquidity. The Hang Seng Property Index is up 14.4% during the same period from August 31. The weakening of the US dollar to which the Hong Kong dollar is pegged along with the relative strengthening of the Chinese yuan just make Hong Kong assets more attractive for Chinese money as shown by the throng of Chinese shoppers flocking to Hong Kong during the recent holidays.

The Chinese markets which reopened on Friday played catch up rising over 3% on the day and the week. The Shanghai Composite Index finally broke through the 2700 level. The top performers were largely from the cyclical sectors on renewed confidence that the Chinese economy is stabilising.

SECTORS – CHINA 1 week 4 weeks YTD
CSI300 Energy 7.8% 6.8% -24.0%
CSI300 Materials 5.3% 9.0% -8.3%
CSI300 Industrials 3.0% 2.6% -7.6%
CSI300 Cons. Discretionary 1.9% 2.7% -3.8%
CSI300 Cons. Staples 2.9% 6.2% 10.0%
CSI300 Healthcare 2.3% 3.7% 22.9%
CSI300 Financials 3.5% 1.9% -26.2%
CSI300 Technology 1.8% 3.7% 17.0%
CSI300 Telecom 4.0% 0.9% -21.0%
CSI300 Utilities 1.8% 1.4% -17.2%
SECTORS – HONG KONG 1 week 4 weeks YTD
HS Financials 2.9% 5.8% -2.0%
HS Utilities 0.1% 1.2% 13.5%
HS Property 2.0% 12.9% 13.1%
HS Commerce & Industry 2.8% 10.1% 11.1%
Click to enlarge

FTSE Xinhua A50 is a market capitalization weighted index comprising the 50 largest “A” (domestic) shares listed in China. In Hong Kong the ETF 2823:HK tracks the index; in the US, FXI tracks a sister index including only the 25 largest mainland companies listed in Hong Kong. The Hang Seng China Enterprises Index covers 40 “H” shares issued by mainland companies listed in Hong Kong. In Hong Kong the ETF 2828:HK tracks the index. The Hang Seng Index currently covers the 43 largest Hong Kong listed companies by capitalization. These HK listed companies include a number of mainland Chinese companies. In Hong Kong the ETF 2800:HK tracks the index. In the US, EWH tracks the MSCI Hong Kong Index which is substantially different from the Hang Seng Index.

Disclosure: Long FT/Xinhua A 50 and CSI300