China's market outlook and what to do about it

CHINA: how sustainable is the A-share's 5,000 level?

  • It is sustainable. China is undergoing its first industrial revolution. People are moving from farms to factories

  • We in Hong Kong are sitting on the doorstep of that industrial revolution, and literally are the water skiers off the back of the Chinese speedboat

  • Of course there are dangers. One is that China faces her own "sub-prime" issues. Key is that the companies which they lend to often play around in the stock market, so if the market were to take a severe hit, the banks would be hurt. And, China is not immune to the USA.

  • But, the overriding job of the government is to create 10 million jobs a year

  • That is all the more pressing ahead of the 17th Party Congress this October, during which many leadership positions are going to be fought for. One hint at the energy of this fight: we still do not know the date of the Conference!

  • Regarding "tightening".

    • First, we don't believe the "overheating" story: how can the place overheat if industrial production and fixed asset investment, i.e. SUPPLY, is expanding?

    • Besides, China already has opened its capital accounts in two odd ways: Macau and the recent measures whereby the Chinese population at large gets to buy Hong Kong shares. I think this will lead to strong downward pressure on the RMB: the population does not trust its banking system, so it does not necessarily wish to exit the RMB per se - but it certainly wants to exit its shonky banks.

So how are you making money for your clients off this?

  • In my own funds I have

  • gone long of the H-Share ETF, the Hang Seng Index Tracker, and the A-Share ETF

  • Also, we have bought the HK Exchange share with the view that more mainland money flooding our way will boost turnover in our stock exchange, therefore profits rise.

Your view of China's rate hikes?

  • As Prof. von Hayek taught me: examine the assumptions of the argument first In this instance: Westerners assume that China has a functioning economy and therefore, that tightening will work. Of course nobody thinks that China has such a functioning economy in which tightening can work!

  • Another assumption is that Beijing rules China. Nothing could be further from the truth: provinces and local governments do. For instance, they own 80% of the stock market! This means that even if rates are hiked by Beijing, there is nothing to stop the local bank branch from lending to local officials who want to finance factories and thus jobs.