Notes From Hong Kong: Lack of Interest

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

Last week, the Shanghai market consolidated while Hong Kong strengthened on good corporate results notably from HSBC on Monday. The FTSE/Xinhua 50 is up 10% since its recent low on July 1. Volume has picked up but retail investors, which normally account for an estimated 70% of the market, lack interest. On Wednesday the Wall Street Journal reported that opening of new trading accounts has been tepid in recent months. This may limit the current upswing.

Writes the WSJ:

So far analysts are forecasting that China A-share market will remain rangebound until investors regain confidence that Beijing has managed to engineer a soft landing for China’s economy. And the best indication of an imminent and sustainable rebound might not be stronger economic data or positive statements from Beijing, but an upsurge in new account applications from China punters.

INDICES 1 week 4 weeks YTD
Hang Seng Index 3.1% 6.4% -0.9%
HS China Enterprises 2.2% 4.7% -4.9%
FTSE/Xinhua A50 -0.2% 5.8% -23.2%
CSI 300 -0.2% 8.3% -19.5%
EWH 3.1% 6.9% 2.4%
FXI 1.7% 3.1% -2.8%
PGJ 2.5% 6.6% -0.1%

The economy remains nevertheless the explanation for the current performance of stocks. From fears of a hard landing of the Chinese economy a few weeks ago, investors have apparently convinced themselves that a slowdown to a more moderate pace is positive. The lower PMI announced last Sunday was taken in stride and Chinese exports will again be in focus on Tuesday with the release of the country's trade figures. Interim results released in Hong Kong thus far have added a positive note. Among H shares reporting next week will be some constituents of FXI:: Huaneng Power (Tuesday), China Citic Bank (Wednesday) and China Coal Energy (Friday).

According to Riedel Research, which conducts a monthly survey of Chinese consumer confidence, we can count on the Chinese consumers to keep spending. Riedel notes that “after the dramatic jump in consumer confidence in June we expected some stabilization and a period to consolidate that gain - this happened in July with findings overall positive.” Confidence is certainly supported by the recent raise in wages. The CSI 300 Consumer Staples Index was up more than 6% last week (the code for the related ETF in Hong Kong is 2841).

On Wednesday last week, concerns about Chinese banks loan portfolios resurfaced with the news that in July China's banking regulator ordered banks to conduct stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets. Analysts are concerned that last year’s record $1.4 trillion of new loans could lead to a surge in delinquent debts. Banks were down 2.5% on the week. We will have a better view of banks performance as a number of Chinese banks will report their interim earnings at the end of the month.

CSI300 Energy -0.6% 11.1% -28.9%
CSI300 Materials 0.2% 12.3% -24.5%
CSI300 Industrials 0.0% 9.5% -13.5%
CSI300 Cons. Discretionary 0.8% 10.0% -13.8%
CSI300 Cons. Staples 6.3% 14.0% -5.6%
CSI300 Healthcare 3.4% 13.0% 5.8%
CSI300 Financials -1.8% 4.4% -24.2%
CSI300 Technology 1.5% 13.9% 7.7%
CSI300 Telecom -0.5% 6.1% -24.1%
CSI300 Utilities -0.5% 6.8% -15.6%

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 FTSE/Xinhua A 50