rlirph

The China Bubble Can't Last

My personal opinion is that too many people write about China's stock market without understanding the intricacy of the system. Since most of the authors have never been to China they just use their western parametrics in assessing the situation.

True China is now awashed with liquidity. But that is not caused by hot money flowing into China from the rest of the world. First of all non Chinese citizens cannot buy stocks in China (the A shares). Foreigners including the 6.7 million Hong Kong citizens cannot buy them either because they are considered as foreigners.

China has a strict capital inflow and outflow mechanisms. Even if George Soro wants to invest his US$10 billion in China he must either obtain government's approval which is highly unlikely or do some illegal transfer.

The surplus of liquidity is mostly caused by U.S. (=trade surplus). When Walmart or any other US companies place a US$10 million order, that order would eventually turn into Chinese Yuan (CNY) or Reminbi (RMB). Simply put the Chinese government becomes a US servant by printing more CNY as requested by the US consumers.

This huge liquidity is what caused the runup in A shares. Now the government wants to divert part of the surplus to Hong Kong. The "Through Train Stock Program To Hong Kong". Originally announced in August with a limit of US$20 billion, the latest news is that limit has been increased to US$50 billion. That means an extra
$50 billion will flow into Hong Kong H share market.

Earlier this month the Chinese government also announced the creation of China Oversea Investment Corporation. This is a government agency whose mission is to increase the return of the country's US$1.44 trillion foreign reserves.

The first capital allocation is US$206 billion. Most people estimate that at least 10% of that (another US$20 billion) will flow into Hong Kong buying Hong stocks and as well as H shares.

In other words, in both China and Hong Kong market, the stock market goes up when there is lots of money coming in. However, this will not stop because China is generating something like US$20 billion trade surplus a month!

This is a classic example of inflation when too much money chasing after the assets. As to when the market will crash my guess is that when the money flow stops coming in, that is when the China trade surplus narrows. Remember that foreign capital cannot go into China (unless they obtain a QDII permit with strict restriciton how much the limit is) and many authors are confused with this facts.

I have moved from Los Angeles to Guangzhou for six months now. Even now I am confused as to the facts as to what apply to H shares and what apply to A shares, even though the underlying share is identical.