Notes From Hong Kong: Tricky Holiday Period Ahead for Shanghai

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

The next two weeks will be shortened trading due to upcoming Asian holidays. Many analysts in China are worried that the government may use this time to introduce new measures to cool down the property market or announce an interest rate hike. The weak performance in Shanghai last week was colored by those fears, while Hong Kong did better riding renewed optimism for the global economy.

INDICES 1 week 4 weeks YTD
Hang Seng Index 3.4% 4.7% 0.4%
HS China Enterprises 2.8% 3.3% -4.9%
FTSE/Xinhua A50 -2.9% -4.5% -27.0%
Shanghai Composite -2.4% -1.7% -20.7%
CSI 300 -2.4% -1.3% -19.6%
US ETFs
EWH 2.7% 7.3% 7.8%
FXI 2.9% 3.8% -2.7%
PGJ 2.4% 3.2% -0.1%

The Shanghai market will be closed from Wednesday, September 22 to Friday, September 24 for the Mid-Autumn Festival and from Friday, October 1 to Thursday, October 8. The Hong Kong market will be closed for only two days during this period: Thursday, September 23 and Friday, October 1.

Since the announcement that the CPI rose to 3.5%, rumors hit the market all through last week that an interest rates increase was imminent. This weakened share prices notably for financials. Western analysts (HSBC, Moody's, JPMorgan, PNB Paribas, to name a few), on the other hand, are adamant that inflation will slow down in the coming months and that the PBOC will not move on rates before the end of the year. Bank stocks were also hit by the Bloomberg story that Chinese regulators

may require China's "systemically important" banks to boost their capital adequacy ratios to as high as 15% by 2012.

Traders in Hong Kong saw the glass half full and the market closed on Friday at its highest level since April 15. Some brokers see the Hang Seng Index moving to 23,000 by the end of the month. Volumes in Hong Kong remain positive but weaker in Shanghai, particularly on Friday.

Over the past two weeks the yuan has appreciated by more than 1.1% against the U.S. dollar. It closed the week at 6.7259 against the U.S. dollar, 1.5% lower than on June 14 when Beijing let the yuan to trade more freely. Is it a coincidence that the U.S. Congress is currently conducting hearings on the currency issue?

SECTORS – CHINA 1 week 4 weeks YTD
CSI300 Energy -4.2% -5.8% -31.8%
CSI300 Materials -2.4% 5.0% -17.9%
CSI300 Industrials -2.3% 0.3% -12.0%
CSI300 Cons. Discretionary -2.1% 2.4% -8.2%
CSI300 Cons. Staples -1.0% 9.6% 2.6%
CSI300 Healthcare -1.0% 11.4% 17.4%
CSI300 Financials -3.4% -7.8% -30.0%
CSI300 Technology 3.6% 8.6% 16.8%
CSI300 Telecom 2.4% 8.6% -19.8%
CSI300 Utilities 0.8% -2.3% -17.8%
SECTORS – HONG KONG 1 week 4 weeks YTD
HS Financials 3.4% 4.9% -4.2%
HS Utilities 2.0% 4.7% 14.4%
HS Property 3.4% 7.5% 3.6%
HS Commerce & Industry 3.5% 3.7% 4.4%

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