Chinese Markets: Hope Springs Eternal

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Includes: CNY, CYB, FCA, FXI
by: Pauline Loong

Summary

Boom and bust in a day on an announcement that never was.

The Hong Kong-Shenzhen stock trading link: Spot the deliberate mistake.

When it comes to optimistic punters, China must hold some kind of record for history repeating itself.

Chinese stocks jumped to their highest levels in three months on an announcement that never was.

But even after regulators made it clear within hours that it was all a terrible misunderstanding, investors clung on in the hope that perhaps there is more to the mix-up than meets the eye.

This is investment strategy 101, Chinese style: Better to risk likely loss than to forgo possible gain.

Stocks in Shenzhen, Shanghai and Hong Kong surged on Wednesday on what appeared to be an announcement of the imminent launch of a direct stock trading link between Shenzhen and Hong Kong. The long-awaited scheme promises to unleash a huge trading bonanza for exchanges on both sides of the border and is seen by investors as a possible trigger for the next Chinese stock rally.

Brokerage firms and stock exchange surged across the board. Turnover rose 50% in Shenzhen, 73% in Shanghai and almost doubled in Hong Kong from the previous day. The buying frenzy sent the share price of Hong Kong Exchanges and Clearing (388: HKG) up 9% - briefly turning it into the world's most valuable bourse by market capitalization.

The excitement began with an article by the Chinese central bank governor saying that the long-awaited link-up between the Hong Kong and Shenzhen stock exchanges will start before the end of the year. The article appeared on the bank's official website before markets opened on Wednesday.

Then came the bombshell. Apparently, it was all a misunderstanding.

During the markets' lunch break, the People's Bank added a sentence into the article making it clear that the governor's remarks had been made in an internal speech in May, well before China's markets reached their astonishing June 12 peak and equally dramatic slump. The Hong Kong stock exchange also issued a statement confirming that regulators in Hong Kong and on the mainland had not yet approved the scheme

Investors were disappointed by unfazed.

Some see the mistimed posting by the central bank governor as no more than a publishing blunder. Others suspect it is a deliberate "mistake" to gauge investor sentiment towards an early launch of the Hong Kong-Shenzhen stock trading link given the earlier rout in A-shares and continuing weakness in the economy. Still others interpret it as a turf war between the central bank and the securities regulator. The stock connect scheme is not believed to be a favored initiative of the Chinese Securities Regulatory Commission.

But whatever the interpretation, investors appeared eager to latch onto any excuse for hope. Shanghai and Shenzhen closed 5.1% and 4.3% higher while Hong Kong's Hang Seng index climbed 3% before ending the day up 2.2%.

When it comes to optimistic punters, China must hold some kind of record for history repeating itself. The PBOC announcement seemed a replay of a similar announcement of direct market trading in 2007.

FROM MONEY TRAIN TO GHOST TRAIN

The public was told in 2007 that a pilot scheme, dubbed the "Tianjin-Hong Kong through train", was about to arrive loaded with investors from the city of Tianjin eager to buy Hong Kong stocks and shares.

None other than Hong Kong's then Financial Secretary confirmed that China's State Administration of Foreign Exchange had approved a pilot scheme to allow Mainland residents to use their own foreign currency to trade on the Hong Kong Stock Exchange. China's official news media said that the 'train' would shortly arrive.

The market took off.

Then rumors grew that the scheme would not be authorized. It turned out that the views of the then Prime Minister Wen Jiabao had not been solicited before the announcement had been made. It was somehow assumed that he would have no objections.

It was not until the then Chief Executive of Hong Kong went to Beijing on a visit and spoke to a deputy governor of the central bank that he discovered the entire scheme was a non-starter.

He was told that Premier Wen Jiabao had decided that the ["through train"] arrangement would take effect after policy measures "were rationalized". However, no timetable was given.

The scheme ended and the rally ended with it. The Hang Seng Index rose 50% in the first ten months of 2007 to reach an historic high of 31,958 before shedding all its gains within the next four months.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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