China’s Booming Stock Market… Where will it end?

Shadow lending on China Flag

Economic slowdown, zombie cities with no-one living in them, the murky world of ‘Shadow Banking’, rampant corruption (or over-zealous crackdown on corruption), inefficient local governments, housing market bubbles….

Recent headlines describing China’s economy haven’t painted a particular positive picture.  Indeed, if we didn’t know better as we read the press, we would have to assume that China’s economy was close to melt-down; an impending collapse which is likely to drag the global economy down with it.

There is always a big difference between the performance of an economy and the performance of a stock market, but the incredible recent returns from China’s stock market are wholly at odds with this news-flow.

Like many developed countries China has a number of different stock markets.  So called “A” shares trade on mainland exchanges such as Shanghai and Shenzhen, whereas “H” shares are Chinese companies listed on the Hang Seng stock exchange in Hong Kong.  It is important to note that these markets have always behaved very differently, and in the past (due mainly to controls around the flow of money into and out of mainland China) a company’s stock listed on mainland exchanges may have traded at a 35% premium over the same stock in Hong Kong.

Last year whilst the world’s media was announcing China’s impending collapse, the Shanghai stock exchange rose by around 50%, with a further 30% rise so far this year – and this as measured in USD – measured in other currencies the growth was even stronger.

Towards the end of last year, financial regulators introduced the ‘Stock Connect’ system which allowed for freer movement of investment money into and out of HK and allowed investors in HK to buy mainland stocks, and vice versa.  Initially the result was that HK investors moved money back into the mainland to try and benefit from the red-hot stock market there, but this year the flow has reversed as Chinese mainland investors look to take advantage of the much cheaper HK stock market.

In contrast to mainland shares, the Hong Kong markets have been much quieter, with growth of only 5.5% last year and 18% so far this year.  However, the fact that Hong Kong markets have been relatively unloved recently appears to be changing.

Earlier this month in Hong Kong, investors traded a record number of shares with a value of USD 37 Billion dollars, as the market returned to levels not seen since 2008.  Some commentators have already started to call this another ‘Bubble’,  but with valuations for the Hang Seng at around 12.9x forward earnings, that call appears to be misplaced.  The fact that valuations remain much lower in Hong Kong suggests that there is a lot more headroom for this market to rise before it will be priced at the same level as Chinese mainland stocks.

However, just because a market is cheap, it isn’t necessarily good value. Investing in volatile markets such as Hong Kong may reap excellent returns over time, but is not without significant risks.  Talk to your AAM financial planner today to discuss whether this is a market to explore further.

Investment Research Team
AAM Advisory


The views expressed in this article are those of the author and do not necessarily reflect the views of AAM Advisory Pte Ltd. This document/article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any securities/products mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment product before making a commitment to purchase the investment product. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of the future performance. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness.