Key points from a fresh BW warning on China’s inauspicious start to the New Year…
- Standard & Poor’s chief technical analyst Mark Arbeter issued a blunt warning to investors flocking to exchange-traded funds on the iShares FTSE/Xinhua China 25 Index Fund…”It kind of reminds you of the dot.com days”.
- There is some $4 trillion in savings sloshing around China, compared to a combined market capitalization of about $1.18 trillion at the exchanges in Shenzhen and Shanghai. “Basically we are looking at lots of money in the domestic system and very limited investment opportunities, “says Huang Yiping, Citigroup chief Asia economist.
- Stocks are certainly delivering better returns than bank deposits right now, which promise a paltry 2.25% on one-year term deposits before a 20% tax on interest, while gains on the stock market are tax free.
- China has amassed more than $1 trillion in foreign reserves, of which about 70% is held in U.S. Treasuries. Although the Chinese central bank attempts to stem the increase in money supply by selling bonds to soak up liquidity—a process known as sterilization—there is a limited appetite for these low-interest-bearing securities, and Chinese savers look to the stock market for better returns.
- With some economists saying the yuan is undervalued by as much as 20%, money is likely to continue flowing into the country. Without a flexible exchange rate, asset-price boom and bust cycles are highly likely.
- It will be some years before China’s bourses catch up with their more mature foreign counterparts. For one thing, short-selling is not allowed, and the absence of derivatives makes hedging impossible. However Shanghai is expected to introduce stock-index futures and equity warrants this year. There are also measures in the works to improve the breadth of the underdeveloped corporate bond market. In the meantime, investors should be ever-ready for that white-knuckle ride.
