China In Focus : Horse-Powered Rally

After last week and my thoughts on Chinese Ferrari-fleet weddings, the Straits Times reported a neat little Rolls Royce one in Tangshan and there will be more ahead as wild horses and commodity prices couldn’t stop the stock rally into their strongest weekly finish since Oct 2010.

http://www.straitstimes.com/the-big-story/asia-report/china/story/lavish-wedding-china-tycoons-son-draws-flak-20141130

 

shcomp weeklyShanghai Composite Weekly Chart

And this must be the strongest sustained trend we have seen in a long time, a rally that started end July till now.

The SHCOMP index is up 7.88% (nice number) for the wecnyek as the currency (CNH) dropped 0.5% against the USD after the unexpected rate cut and more reforms in the domestic market to allow margin trading funds for IPO subscriptions, just in time for the upcoming IPOs.

Biggest gainers : China Galaxy +20.8%, Haitong Securities +19.4%, China Life Insurance +18.4%, CITIC Securities +16.5%

The CNH/CNY spread continues to echo the refrains of the skeptics, widening out on a liquidity squeeze in the market due to IPO activity which we shall see in the coming week.

CNYCNH

As I type on this lazy Monday morning, with gold and black gold both in decline, China reported some not so uplifting PMI numbers and markets are widely expecting another rate cut now for early 2015.

Concerns are showing up ONSHORE now with Chinese rating companies predicting defaults.

Nov. 28 (Bloomberg) — Rating companies say defaults in China will spread as the central bank’s interest rate cut will do little to stop a wave of maturities from worsening record debt downgrades.
Chinese credit assessors slashed grades on 83 firms this year, already matching the record number in all of 2013, according to data compiled by Shenzhen-based China Investment Securities Co. Companies must repay 2.1 trillion yuan ($342 billion) in the first six months of 2015, the most for any half, data compiled by Bloomberg show.
Oddly enough, government researchers have come up with a report on about $6.8 trillion (USD) of “wasted” investments since 2009. This is the most read report on China I expect for last weekend. http://www.ft.com/intl/cms/s/0/002a1978-7629-11e4-9761-00144feabdc0.html?siteedition=intl#axzz3KbjFL0Eh

“Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8tn in wasted investment since 2009, according to a report by government researchers.

In 2009 and 2013 alone, “ineffective investment” came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC.

China is this year on track to grow at its slowest annual pace since 1990, and the report highlights growing concern in the Chinese leadership about the potential economic and social consequences if wasteful investment leaves projects abandoned and bad loans overloading the financial system.

 

I am, however, unsure of whether the Chinese market is indeed overbought, as BofA claims and that we are in for a correction.

The surge in Chinese equity trading that coincided with market peaks in 2009 and 2010 is back again after the Shanghai Composite (SHCOMP) Index jumped to a three-year high.

The 30-day average daily value of shares changing hands on the Shanghai exchange exceeded 200 billion yuan ($32.6 billion) for the first time in four years on Nov. 25, after rising threefold in the past six months, according to data compiled by Bloomberg. Turnover last breached this level on Nov. 9, 2010, the same day the Shanghai Composite began its slide into a 38 percent bear market. The previous surge came on Aug. 7, 2009, two days after the start of a 23 percent retreat. 

http://www.bloomberg.com/news/2014-11-26/china-trading-boom-that-marked-end-of-past-bull-markets-is-back.html?hootPostID=1f7b9c61d67c6006603baf5503492a82

That is because the new rules that have opened up capital markets have just hit the streets, along with the margin trading greed machine that will undoubtedly ignite the retail engine to go for broke now that casinos have fallen out of favour leaving the stock market as the main casino serving Chinese clients.

My brilliant idea for the good of the Chinese market would be to legitimise all the shadow banks as asset managers, thus killing 2 birds with 1 stone, boosting their fledging fund management industry and eliminating the shadow banking lodestone to give their financial markets a clean bill of health.

Yet like I said last week, “The spike next week will be opportune for profit taking for bonds and equities.” and I stand by it because the risks and rewards are weighing out less evenly and real estate investments do account for about 15% of GDP which means that China’s housing production per 1000 people at 35 (highest in the world because no other country has a figure of greater than 14), means there is plenty of inventory left in the system, along with the stockpiles of iron ore, steel and coal.

Good luck with the markets !

Bond Prices (indicative)

CNH BONDSCNH BONDS 2