China - Market Direction 01 (May 12 - Jul 15)

[winston]

China’s Whacky Market: How Long Can They Keep This Up? By Harry S. Dent Jr.

On April 16, the Shanghai Composite stock index rose 4.4% and Hong Kong’s market went up 7.9%.

The next day, China’s exports got reported down 15% year-over-year… while the stock index rose another 2.9%, crossing 4,300. The news hasn’t changed, but now it’s over 4,500!

Is that whacky or what?

Exports count for anywhere between 35% to 50% of China’s GDP. Just think of all the made-in-China gizmos and gadgets you might have in your own household! For them, a 15% drop is a big deal.

They’re the largest manufacturing and export operation in the world today. That means you also have to consider all the emerging countries exporting raw materials to China to feed this operation.

With demand dropping over most of the world, this is bad news for the entire global economy.

The truth of it is that I’ve used China’s stock market as a leading indicator for how the global economy is fairing for a few years. It’s been the worst performer of any major country since February of 2010 when a short and feeble bounce ended as the rest of the world continued up.

But since mid-2014 we have a new “junior” bubble that’s going exponential like the last one, though that one was bigger:

See larger image

As you can see, that bubble just lasted a little over two years, going up six times from mid-2005 to late 2007. Then, it crashed 72% in just one year.

I’ve said ever since that was a classic long-term 5th wave bubble top — the kind that will not be exceeded for decades, if ever.

Now, in a period of worsening news for the Chinese economy, we have this current last-ditch “mini” bubble.

After nearly retesting its 2008 lows, the Shanghai Composite has doubled in less than a year. The Chinese most like to speculate in Hong Kong’s Hang Seng index, and that’s gone up almost 5,000 points to 28,433 (as of today) just since March.

It’s the same moronic bubble logic in our own markets!

The “strengthening” economy isn’t what’s driving this. It’s the fact that Chinese investors have suddenly shifted to speculating in stocks, now that real estate has started to fall over the last several months.

This is the opposite of what U.S. investors did in 2000. When tech stocks started going down, they immediately switched to speculating in real estate.

But the logic is fundamentally the same. Stocks to real estate, real estate to stocks… bubble after bubble, we’re always idiots. We never want the bubble to end.

The thing about the U.S., however, is that the fundamental trends in demographics and interest rates still favored real estate for years after 2000. In that case we weren’t building a house on a bed of sand, there was a firm foundation supporting it!

But in China, growth and GDP continue to decelerate. The median price/earnings (P/E) ratio in China’s Shanghai Composite is now 44. Compare that to the S&P 500’s P/E ratio of 20!

Tech stocks in China, of course, aren’t as high a percentage of its stock market as in the U.S… but they’re much more overvalued, putting them at even greater disparity than U.S. tech stocks, especially after Alibaba’s IPO in September.

Adam recently commented on how the run-up in Chinese stocks is a result of the rapid rise in new brokerage accounts. Might sound okay, if two-thirds of those people didn’t have less than a high school education! It’s a classic case of the dumb money piling in right at the end!

What’s worse is that the Chinese government is encouraging this stock bubble to help offset the decline of the real estate bubble, which is much more extreme than the stock one.

How naïve to think you can let the greatest bubble in real estate (where the Chinese have the majority of their wealth) in modern history decline, and have a bubble in stocks (a very small percentage of their wealth) make up for it?

That’s why bubble logic is so incredible. It’s where human beings, the smartest species by far on the planet, display their immense capacity for stupidity.

If you look back to the Shanghai Composite chart above, I see this rally as the final wave of a “B” wave or bear market rally — not anywhere close to a new bull market.

Sure, it recently broke through a Fibonacci resistance level of 4,400, which means it’ll likely climb higher from here… but for how much longer?

Source: Economy & Markets

[behappyalways]

China's surging stocks: why the bull-run days are numbered
http://www.scmp.com/comment/insight-opi ... e-numbered

[behappyalways]

傳人行推QE　內銀股發威
四大行全線升　港股保不失
http://hk.apple.nextmedia.com/financees ... 9/19129349

[behappyalways]

China's Crazy Stock Market, Charted
http://www.bloomberg.com/news/articles/ ... et-charted

[winston]

Shanghai Slumps 4% In One Day: Who’ve Been Selling? By Shuli Ren

Today was not good for China’s stock market. The Shanghai Composite Index dipped 4.1%, the Hang Seng China Enterprises Index followed lower, down 2.6%, and the Hang Seng Index fell 1.3%.

So what happened?

Investors and traders uniformly point to the flood of 25 new IPOs this week, estimated to lock up 3 trillion yuan, that is draining massive amount of liquidity out of the stock market. In my April 4 column”Shanghai’s Stock Market Has Room to Run“, I explained why China’s distorted IPO system can derail the stock market:

Over the next few weeks, 44 IPOs are scheduled, seeking 24 billion yuan ($3.9 billion), according to Chinese data provider Wind. The IPO market is a dinosaur from China’s command economy. Unlike the U.S., where any firm can go public if it meets the SEC’s financial standards, in China, Beijing picks the companies.

Beijing also keeps IPO valuations low. Bloomberg last week reported that few companies go public for more than 23 times earnings, and the 68 companies that started trading this year have surged about 200% on average.

Implicit approval from Beijing and instant investment profits make IPOs very popular and they are often over 100 times subscribed. That can drain liquidity from the rest of the market.

New IPOs are popular with retail investors.

Second, traders also point to editorials from Xinhua News Agency and People’s Daily, which warned retail investors of risks in stock markets. Market participants saw this as a prelude to Beijing clamping down further on margin financing.

Third, rumors of Beijing imposing stamp duty on stock transactions resurfaced again.

Pre-market, the iShares Large Cap ETF (FXI) already fell 2.9%. The iShares MSCI Emerging Markets ETF (EEM) dropped 0.7%. All the China ETFs, the iShares MSCI China ETF (MCHI), Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund (ASHR), and CSOP FTSE China A50 ETF (AFTY), will likely see big movements today.

Source: Barron's Asia

[winston]

How Much Leverage Is In Shanghai And Why This Bull Will Slow By Shuli Ren

Market participants are worried that brokers, in their response to Beijing’s urge to control a debt-fueled bull rally, are lowering collateral conversion ratios.

So the question is: how much leverage is in the China’s stock markets right now?

The short question is: No one really knows, including Beijing. So we all have to estimate and guess.

Credit Suisse‘s strategist Vincent Chan believes right now, 6-9% of China’s market cap is funded by debt.

The most transparent and well-known is the traditional margin financing, at 1.7 trillion yuan as of April 22. But there are other sources of debt financing, the most famous being the umbrella trusts, which are already banned.

Pledge-style stock repo, which gives loans to owners who pledge their stocks to banks or brokers, can be sizable too, estimated to be around 600-800 billion. Altogether, the other forms of debt financing can be as big as margin financing, or another 1.4-1.7 trillion yuan. (See my April 19 blog “4 Ways To Lever Up In China: How Big Is “Umbrella Trust”?“)

Investors who trade on margin via brokers, mostly hedge funds and high-net-worth retail investors, are very active traders. Even though margin financing accounts for less than 5% of China’s total market cap, they are responsible for 15-16% of market turnover, said Credit Suisse.

But it is unreasonable to say all debt-financed money contribute to 30-50% of China’s turnover, because investors that use other forms of financing are not such high-frequency traders.

It is time for the “leveraged bull” to slow down, argued China Securities Journal, a state-owned financial magazine, after the market close today. Currently, brokers have about 600 billion yuan net assets. According to the securities regulator, brokers’ risky assets can not exceed risk-free assets.

The magazine did a rough calculation and concluded that brokers can not provide more than 2.1 trillion yuan of margin financing. In other words, as of April 22, the amount of margin financing in the market was already hitting close to the ceiling.

But don’t expect a mad bear either. See my earlier blog “Why Beijing Needs A Bull Market“.

Source: Barron's

[winston]

It's Time to Get Ready for the End of China's Bull Market

http://www.bloomberg.com/news/articles/ ... =BBD050615

[winston]

A spate of initial public offerings in China could lock up some 3 trillion yuan worth of subscription capital next week, analysts estimate, reducing liquidity in a market already under regulatory scrutiny over leveraged bets.

Source: The Standard HK

[winston]

MSCI will announce on June 9 ( 5pm US Time ) on whether to include Chinese A shares or not.

Source: CNBC

[eauyong]

China Convinces Mobius It’s Ready for MSCI LINK