Home  Contact Us
  Follow Us On:
 
Search:
Advertising Advertising Free Newsletter Free E-Newsletter
Magazine
  
      2024       2023       2022       2021       2020       2019       2018       2017       2016       2015       2014       2013       2012       2011       2010       2009       2008

INVESTMENT: Will the New Shenzhen-Hong Kong Link Provide Returns that the Investors Are Looking For?
Share to

Will the New Shenzhen-Hong Kong Link

Provide Returns that the Investors Are Looking For?

By Anthony Lawry


BT 201610 070 03 Investment shenzhen stock exchangeMany have looked at the world's second largest economy (largest in terms of purchasing power parity) and mused that all investment opportunities have been taken advantage of with China. Furthermore, it seems as though anyone looking for returns is hard pressed to find a somewhat affordable initial investment with high yields. Even traditional safe haven assets such as US treasuries are now seen as risky given the greater uncertainty and chance of volatility given global geopolitical conditions such as Brexit and the chance of increased US interest rate hikes which if even speculated on can lead to pure carnage in stocks and bond markets. Weak growth, stagnant productivity, and uninspiring inflation have left the developed world bewildered.


Because of this, a large degree of stock rallies in the Hang Seng have surpassed that of Shanghai thanks to outsider investors speculation on the increased marketization of the Hong Kong-Shenzhen link which was just given the go-ahead by Chinese officials. This is likely to lead to rallies in most if not all Chinese indices. Furthermore, because US equities are likely to see some losses from Janet Yellen's interest rate decision to come later in September in conjunction with the seemingly abysmal returns in nearly every asset, there is a surge towards riskier ventures into emerging markets like China. Although these sorts of moves on US interest rates are often foretold to Chinese officials ahead of time so as to maintain market stability, the impact is nonetheless palpable but sometimes significantly overblown. These events may create temporary down days, but overall market trends of the last half year have yet to subside.

BT 201610 070 01 Investment BN PA838 chlink G 20160722040234In spite of this appetite for more risk in exchange of higher returns, a note by JP Morgan points out that Chinese stocks have underperformed their US counterparts by eight to ten percent since 2011 in terms of dividends. Specifically though, this was in large part because of the market selloff in China in the summer of 2015, but other concerns are still abound from an outsider's perspective on Chinese equity markets. China's debt balance sheet has yet to offer a conclusive reassurance to the market concerning its provincial and private debt. But as JP Morgan pointed out, the disinterest in the recent market link could be reversed if China incentivized and extremely leveraged enterprises reduced their dependence on short-term loans and transited to longer-maturing bonds or even equity options. While the details of the link have yet to become fully articulated, if these sort of options become available they are likely to be the most popular and for good reason due to their safe-haven nature given China's overall positive credit ratings and likely potential for increased long-term growth currently being stifled by global conditions and the tug-of-war like attitude of foreign governments.


If more Chinese companies begin to pursue an increase in bond offerings over short-term loans, there is no doubt Chinese equities will become more appetizing to foreign and domestic investors due to the positive impact that such moves would make on balance sheets. Either way, the recent link should not be downplayed; outside investors looking for those elusive returns are looking for any excuse they can to pour the money they are holding on the sides (which seems to be quite a lot overall for larger investors) into something, almost anything. It is the reason why the current rally in the US equity markets has continued for so long giving the indices continuous record-breaking days.

BT 201610 070 02 Investment 1373617 3fb203321c64fd4f1b8a3aa0a6474041The link represents a substantial shift towards liberalization that President Xi has been attempting to achieve ever since massive market reforms were announced in the 3rd Plenum of the 18th Communist Party of China. It is the largest capital market reform to occur in China since the crash in 2015 which led to a 40 percent slump. Most likely the move was pushed forward to increase the appetite of outside investors and increase liquidity in a market now somewhat viewed as volatile, especially given the slowdown.


In spite of this, many opportunities are abound that have yet to have been capitalized on. The Shenzhen market can be viewed as a technology-based exchange with nearly 25 percent of the stocks listed on the exchange as tech stocks, but the index has fallen nearly 10 percent on the year as January was a rough month for mostly all global equities. Again though, can this link substantively be an indicator of the finality of returns investors are looking for in China's market? Maybe, but again probably not. It appears to be that China's outline for the link to create an incentivization for a large degree of capitalization into the markets has fallen mostly flat, perhaps aside from the investment in Chinese brokerage firms which largely gained from the move like Haitong International, China Galaxy, Huatai Securities, CITIC Securities and Central China Securities. However, that train has proverbially left the station.


What is next is of course obscured by the continuation of uncertainty in a global environment in which investors are just simply not confident enough in the overall macroeconomic atmosphere to begin a truly substantive push for confident medium and long-term investments. This is especially true for China, but also for emerging markets throughout Asia. However, once this timidity subsides, the factoid that the price-to-earnings ratio of the Shenzhen market is a whopping 36 may all of a sudden become appetizing once again. That being said, textbook investing reminds us to buy low and sell high. Right now, it appears the market is stagnant and not many moves are being made apart from the gradual rise of the Hang Seng. Yet, if a rally is on the cards for the next year or so, now is absolutely the time to get into Chinese equities while the rest of the world has yet to catch on. Of course, the link is somewhat a sign of the desire for increased capitalization, but should be seen as an investment opportunity rather than an act of desperation of which the Chinese economy is absolutely not enduring as of right now.


---END---

    Subscription    |     Advertising    |     Contact Us    |
Address: Magnetic Plaza, Building A4, 6th Floor, Binshui Xi Dao.
Nankai District. 300381 TIANJIN. PR CHINA
Tel: +86 22 23917700
E-mail: webmaster@businesstianjin.com
Copyright 2024 BusinessTianjin.com. All rights reserved.