OPTIMISM OVER CHINA PROVES INFECTIOUS WITH ITS NEIGHBOURS

Published on July 22, 2009 by brooks | This story has been viewed 158 views

China’s stock markets have been among the world’s best performers this year, with signs that its various stimulus programmes are keeping its economy growing strongly amid the global slump.

Optimism over China has spilled into the neighbouring markets of Taiwan – itself a beneficiary of improving cross-straits relations – and Hong Kong. Both have significantly outperformed the US this year, begging the question: are they dancing to the tune of mainland China rather than the US?

Steven Sun, senior China strategist at HSBC, said: “Certainly you can say this is a greater China bloc, and it makes sense for policies made in mainland China to have more impact in either Hong Kong or Taiwan so, as a result, if the market correlation becomes higher, it would not be surprising.”

The Shanghai Composite index has climbed 79 per cent this year, while the S&P 500 has gained just 5 per cent. The Hang Seng has risen 35 per cent – including a 3.7 per cent jump yesterday – and Taiwan’s weighted index (Taiex) has rallied 51 per cent after yesterday’s 1.3 per cent rise. The H shares of mainland Chinese companies traded in Hong Kong have risen 47 per cent.

Jing Ulrich, chairman of China equities at JPMorgan, says: “Naturally there would be some degree of correlation in the recent performance of markets in Hong Kong and mainland China, since common themes are driving investor sentiment in both markets.”

Among the world’s leading economies, China has emerged as the least affected by the financial crisis, thanks to a swiftly implemented stimulus plan and record bank lending.

The country’s economic growth accelerated to 7.9 per cent in the second quarter – at a time when many other big economies remained mired in recession or subject to anaemic growth. That growth has had an impact on the economies of those markets and countries that are geographically closest to China.

In Taiwan, improved cross-strait relations are playing a significant role in buoying market sentiment. That includes events such as China Mobile’s proposal to make the first Chinese investment in a listed Taiwanese company by buying 12 per cent in Taiwan’s Far EasTone mobile operator.

JPMorgan’s Ms Ulrich also points out that Taiwan is expected to accept mainland investments into selected industries and its banks are set to become more active in the provision of financial services in China. The rise in the Taiex not only reflects Taiwan’s thawing relations with China. Analysts say that since the Kuomintang won elections last year, Taiwanese have been repatriating their savings and investing them in the stock market and property.

Glenn Maguire, chief Asia-Pacific economist at Société Générale, says: “The Taiwan [market] has been playing a process of catch up.” But the closer ties and benefits of the stimulus does not necessarily represent a sharp shift away from correlation with the US markets, to which both Hong Kong’s and Taiwan’s economies retain strong links.

Indeed, the rebound in the Hang Seng and Taiwan only began in early March at the same time as the US and other leading developed economies. The Shanghai market bottomed in early November and has surged 91 per cent since then.

Hong Kong remains highly dependent on international trade, much of which is ultimately driven by the US. Exports make up 60 per cent of Taiwan’s economy. This exposure to global economic trends is not going to change any time soon.

This supports evidence that both the Hang Seng and Taiex remain more correlated to the US markets than to Shanghai for now.

Even last week, when China’s better-than- expected GDP figures were announced, Shanghai closed down and the rest of Asia higher.

In any case, Hong Kong and Taiwan are not the only Asian markets that have rallied this year. The Indian market has risen 57 per cent while Indonesia is 55 per cent higher, suggesting the gains are also linked to a broader Asian emerging market rally.

Mark Matthews, Asia- Pacific strategist at Fox-Pitt Kelton, says: “If the US is not doing well but is not in crisis, then that can actually be quite a good scenario for Asian stocks. For example the S&P rose just 10 per cent from the beginning of 1992 to the end of 1994 in the aftermath of the savings and loans crisis. Over the same three-year period, Asian markets almost doubled.”

Importantly, the very different investor bases for Hong Kong, Taiwan and Shanghai affects trading patterns. Foreign investors have extremely limited access to Chinese domestic currency mainland shares. As a result, the direction of mainland markets is based as much on momentum and liquidity as fundamentals, analysts say.

Individuals also have very limited investment choices, making the Shanghai and Shenzhen stock markets extremely attractive when they start rising. Recent gains have been augmented by companies investing retained earnings.

Partly reflecting this difference, Chinese mainland A shares trade at a 47 per cent premium to the H shares, according to JPMorgan figures.

Conversely, only about 30 per cent of the shares on the Hang Seng are held by retail investors, HSBC’s Mr Sun says. Fox-Pitt Kelton’s Mr Matthews says H shares in particular are heavily dominated by international institutional investors, which means it has a very tight correlation with the S&P 500.

Although Hong Kong and Taiwan’s links with the US look set to remain strong, the growing influence of mainland China is clear.

As HSBC’s Mr Sun says: “This financial crisis has reinforced the broad trend across Asia that economic and financial power is shifting from west to east.”

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