China in Bull Market

Barron’s is reporting the seven year bear market in China is over as stocks have rallied 20 percent off their March lows.

Francis Cheung, China strategist for CLSA in Hong Kong, notes that other factors are channeling money toward China. Some investors have redirected funds to China from sanction-ridden Russia. But more important is this fall’s loosening of restrictions on both foreign and local investments. As of Oct. 13, overseas buyers will be able to own China’s listed A shares, available in Shanghai, previously the exclusive domain of Chinese investors, and local buyers will for the first time be able to invest in H shares, now available in Hong Kong. In essence, the stocks will trade as if they were dual-listed. It has been dubbed the “through train” in China because the shares will travel freely between the two markets. At the outset, Hong Kong investors will be able to invest in 568 of the most liquid A-share stocks and Chinese buyers will be able to trade 266 Hong Kong H shares.

How long will the rally last?

How long will the rally last? Even after their recent gains, China’s stocks are still the cheapest in Asia, selling at book value with 8% earnings growth forecast for this year and 10% for next year. Mansfield Mok, a portfolio manager with EFG Asset Management in Hong Kong, claims that “China is now poised for a longer-term rerating because we will see an acceleration of the reform process” as Beijing tries to improve the quality and competitiveness of its businesses.

Aug9_Shanghai(lAug9_Hang Seng(click here if charts are not observable)

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