China's Latest Financial Coup: Buy 'H' Shares

We are surprised at how quickly China is opting to open her capital accounts. Perhaps positioning ahead of the 17th Party Congress is playing a role? Handing out goodies just before major elections always fortifies positions, from Beijing to Washington...

1. What happened

Yesterday, Beijing began allowing individuals to buy non-Chinese shares through the Tianjin Branch of the Bank of China.

This is a low frequency/high impact event. But don't get carried away: institutions in China already have been allowed to buy overseas stock through their Qualified Domestic Investor Schemes. So the big news is that now, the little gets to buy overseas stock (legally).

2. Why this threatens the RMB longer term

We have warned clients for a long time about the supposedly "undervalued" RMB, and wonder just what US Congressmen are referring to with this nonsense. "Undervalued" relative to what?

Viewed differently, the RMB is OVERvalued relative to its banking system - and this is going to reverse, the more that China allows its excess supply of money to wash onto "foreign" shores such as Hong Kong's. The smart Chinese will want to exit the RMB not for the sake of exiting the currency, but for the express purpose of exiting the banking system which backs up the currency. Everyone in China distrusts their own banks.

Thus, you have "Bankers Mistrust" in China and in the United States ! This ties in with our contested piece of 16th August on why China's A-share market is not immune from a crash either. Us more experienced folks have been around the blocks enough to know that nothing goes in a straight line, so as responsible professionals we have to flag dangers on the road up.

How to Money Off This Idea

1. Always discuss these ideas with your financial adviser before acting!
2. Go long the undervalued H-Share ETF here in Hong Kong: everyone knows that it is undervalued relative to its A-Share Comrades in China
3. Go long the Hang Seng Tracker - a rising tide lifts all boats, and
4. Go long the Hang Seng Index stock itself: with turnover here rising, the stock should rocket.

Comments

[Siwei Zhong:]

a more profitable approach will be to long HSCEI index which tracks H-shares listed in HK.

Hang Seng index has ~50% of constituents from H-shares, while Hang Seng China Enterprises Index (HSCEI) tracks all of them.

i've done an excel, updated today here showing all H-share constituents discounts if anyone interested to look into individual H-share in the index
spreadsheets.google.co...;output=html&g...

a ETF 2828.HK is available tracking HSCEI

2007 Aug 21 07:48 PM

[dpinvest:]

Siwei, enjoy your comments. thx for H share discount spreadsheet. do you consider FXI as good proxy for US investor looking for H share investment? what are pluses/minuses of FXI vs. HSCEI?

2007 Aug 24 04:01 PM

[Siwei Zhong:]

donald, FXI is a good choice if you have no HK trading A/C.
I've written an article in June comparing FXI, CAF and A50 tracker, though it's not updated but I think it is still a good reference.

www.letsthinkchina.com...

2007 Aug 31 09:06 AM

[STLPlace:]

I think at this stage, this H share move won't have much effect. The minimum balance is HKD 100,000, which is not small change for most Chinese.

I discussed this a bit at my blog:

www.stlplace.com/2007/.../

I think for the long term, Chinese investors will follow what they did in A shares lately: hand their money to fund managers, and let professonals hand their money.

By the way, why the mistrust on Chinese banks? I can understand the frustration of the "long waiting line", but not aware of mistrust.

2007 Aug 21 11:19 PM

[Lei Yang:]

Among those playing the Shanghai market, who does not have 100k nowadays?

:)

2007 Aug 22 08:53 AM

[iddjjs:]

This author is keeping writing misleading articles, or using his own words, nonsense. In 8/16’s article, he said Shanghai index “plunged about 6% today alone! ”, when in fact it only lost about 2%, and it was the only one of a couple meaningful drops SSE had over a month during which SSE gained 40% from 3550 to 4900. Of course his article would be “contested”, because not all people are as blind as he was! Since that article published, US market has had a U-turn, so has SSE, which in 3 days gained over 300pts or 7%. Today, SSE closed at an all time high of 4980, just shy of 5000 historic mark. Yet the author came out with another almost laughable article, claiming that Chinese RMB is OVERvalued, and “Everyone in China distrusts their own banks”, LOL! Is this guy living in vacuum, or does he have some hidden agenda? He said “We have warned clients…”, blablabla. I truly hope his clients will not take what he said in earnest, otherwise they’re not gonna do well. Period!

2007 Aug 22 11:01 AM

[huangthomas:]

Jim, I agree with you. This guy has a propensity of over-stating the fact and packaging his personal views as facts. Chinese do trust their bank and the trust is what's holding the economic life in China together. Why he call a single day 2% dip as "crack" is entirely beyond me.

2007 Aug 22 06:02 PM

[evilll:]

One thing is for sure: HKD 100,000 poses no threshold for ordinary Chinese investors.

2007 Aug 22 11:12 PM