Cracks in China's stock market wall « Bankrate, Inc.
The stock market in Shanghai has been on a tear in recent months, but it took a hard tumble on Thursday. The Shanghai Composite Index fell 6.5 percent in one day as over-leveraged investors fled the feverish market conditions, the Wall Street Journal reported. The index is up about 134 percent over one year ago.
Does the Chinese stock market have room to run, or is it ready to crash?
Here’s what’s going on
Regulators in China recently made it possible for foreign investors to invest in companies in mainland China through a direct link between the Hong Kong and Shanghai markets. The Shanghai-Hong Kong Stock Connect opened in November 2014. According to Thomson Reuters, it lets investors in Hong Kong buy shares of mainland Chinese companies denominated in Chinese currency. Also notable, the Stock Connect lets Chinese investors buy stocks listed on the Hong Kong stock exchange.
Right now there are limit quotas on how much investors can trade, but it’s predicted that the quotas will go away with time as the strict controls are eroded.
Barriers will be further broken down as cross-border mutual funds sales begin on July 1, Bloomberg reported last week. That’s not all: On Tuesday a major index creator, the FTSE Group, announced the launch of two transitional emerging markets indexes that would include China A shares.
Institutional investors, such as mutual funds that use FTSE indexes as benchmarks, will be able to adopt the new indexes this year. Eventually Chinese stocks, including all share types, will comprise up to half of FTSE Emerging Index.
What are China A shares?
A shares are traded on the Shanghai exchange while H shares are listed in Hong Kong. There’s often a valuation gap between a company’s A shares and H shares which should go away as the mainland Chinese market is opened.
OK, so why should you care?
No matter how you slice the Chinese economy, it’s pretty big. China boasts the second largest economy in the world by GDP, after the U.S., so ignoring China is not an option for global investors.
Plus, the mainland stock market is opening up in a whole new way. It’s been a little more than six months since the Stock Connect opened and the Shanghai A index was up 87.89 percent as of Thursday. The index tracks the A-shares on the Shanghai Stock Exchange.
“You have a couple of things going on: China is relaxing their investment rules. There are new ways for foreign investors to invest directly into China and new ways for Chinese investors to invest outside of China,” says Bryn Torkelson, chief investment officer at Mattisse Funds, a purveyor of closed-end funds, one of which invests partly in China.
Regulators have said that they expect to raise the daily quotas allowed through the program. That is significant because some believe the Hong Kong market will get a lot more liquidity, according to Torkelson.
“The average daily volume in Hong Kong will increase by 6 percent. Of the entire Hong Kong total market cap, that number is forecasted to go up significantly as they allow more volume to happen,” he says.
Highly liquid markets are generally better for investors as price swings tend to be slower and less volatile.
Stock market regulations aren’t the only thing driving the recent rally in China’s stock market. Another ingredient fueling the market is the series of interest rate cuts made by the People’s Bank of China since November.
Historically lower interest rates have been bullish for stocks.
The U.S. makes up half of the global stock market, but investors limit themselves by sticking close to home in their portfolios.
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Senior investing reporter Sheyna Steiner is a co-author of “Future Millionaires’ Guidebook,” an e-book written by Bankrate editors and reporters. It’s available at all the major e-book retailers.
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Cracks in China's stock market wall « Bankrate, Inc.
