The Marco Polo rally in Hong Kong

April 16, 2015 10:29 PM (UTC+8)


Like Marco Polo, western money managers took a year to grope their way through the mental equivalent of mountains and deserts to arrive in legendary Cathay. It took them long enough, but now the world has discovered the Hong Kong stock market. Asia Unhedged has been an unabashed China bull on the basis of valuations: at a P/E of less than 10, the Hang Seng China Enterprises Index is priced at just half the S&P 500,

Bull markets can take on a life of their own, and Mark Hulbert argues (in today’s most-read Barron’s article) that a shift in global markets will force capital flows into Chinese stocks:

Chinese stocks have been on a tear recently — the iShares FTSE China exchange-traded fund (ticker: FCHI ) has jumped 23% over just the past four weeks — and thanks to a big change in the investing landscape, it may have a tailwind for years to come. The Chinese market should receive a big boost from the increasing percentage of international equity assets that are destined to become benchmarked to it.

Few investors are aware of how the construction of international benchmarks can affect fund flows. Most analysts who focus on China concentrate on other factors, such as the growth rate of the country’s economy. The World Bank last week predicted China’s gross domestic product would grow at 7.1% this year, which, while a blistering pace, is below the consensus as recently as late last year.

The benefit that the surging Chinese stock market will receive from shifts in international benchmarks, however, is not dependent on its economic growth rate, central bank activity, or any of the other financial factors that are investors’ typical focus. The boost instead is a function of the assets that will get automatically transferred from other countries’ equities into the Chinese market as China’s share of those benchmarks grows.

The Economist, meanwhile, has discovered that China is undertaking reforms, and that the reforms are substantive:

The robustness (of China’s economy) rests on several pillars. Most of China’s debts are domestic, and the government still has enough sway to stop debtors and creditors getting into a panic. The country is shifting the balance away from investment and towards consumption, which will put the economy on more stable ground (see article). Thanks to a boom in services, China generated over 13m new urban jobs last year, a record that makes slower growth tolerable. Given China’s far bigger economy, expected growth of 7% this year would boost the global economy by more than 14% growth did in 2007.

However, the real reason to doubt the pessimists is China’s reforms. After a decade of dithering, the government is acting in three vital areas. First, in finance, it has started to loosen control over interest rates and the flow of capital across China’s borders…

The second area is fiscal. R///The central government will transfer funds to provinces, especially for social priorities, while local governments will receive more tax revenues.

The third area of reform is administrative. In early 2013, at the start of his term as prime minister, Li Keqiang pledged that he would cut red tape and make life easier for private companies. It is easy to be cynical, yet there has been a boom in the registration of private firms: 3.6m were created last year, almost double 2012’s total.