Peter's Perspective
16th April 2015 by Peter Churchouse

We Need to Talk About China…

Earlier this week I did a slot on Hong Kong’s daily English language radio program called “Money for Nothing” – reference to the 1990’s song by Dire Straits.

The host asked me…

“Peter, you have been around these markets for more than thirty years, have you ever seen anything like what we are seeing in the market right now?”

She was referring to explosive rally in Mainland China stocks over the past 6 months. He was also talking about the massive surge in turnover on the Hong Kong stock market that kicked into gear the day the markets opened after the Easter break.

Well, to answer the question… Yes.

I’ve been here 35 years now but you don’t have to go back that far!

I saw the 2006 rally that sent Mainland stocks up 500% in 2 years.

And I saw the late 2007 rally in Hong Kong’s Hang Seng index where the market spiked 55% in just 2 and a half months.

And right now this is just the latest episode…

Our readers have been positioned for this for a while now.

In April last year we recommended buying the broad Hong Kong index (“The “Through Train” is a Happening”)… we’re up 25% there.

In May of last year we recommended buying 2 specific China real estate developer stocks (“A Pullback on Asian Real Estate Cooling Measures?”). This was a HUGELY counter-consensus call at the time. Our picks are up 50% and 64% respectively.

*Note: in the interests of disclosure, I am a non-executive board member of China developer Longfor Properties (966 HK) along with Hong Kong property company Hysan Development Co Ltd (14 HK) so I cannot comment on those specific companies.

And in August of last year we recommended that subscribers to The Churchouse Letter (“The Bears Are Wrong”) buy China A-Shares (i.e. China stocks listed in China) and H-Shares (i.e. China stocks listed in Hong Kong). Those are up 80% and 32% respectively.

China's CSI 300 Index - Historical Index from January 2002 to April 2015

So is this rally justified?

The answer is both yes and no.

From a valuation perspective, one could argue yes.

Neither China nor its cheaper cousin Hong Kong is particularly expensive right now, trading at mid to low teen price-to-earnings ratios respectively. Nothing much to concern us there…

But unfortunately, fundamentals rarely apply in the case of Mainland China stocks.

Valuations are of little importance…

The China market (and Hong Kong to a lesser extent) is notoriously driven by retail money.

Approximately 90% of trading in China’s stock markets is retail money. And these guys are punters.

This is not news to anyone who follows the China market.

So if you think Mr. and Mrs. Wong from Shanghai or Shenzhen are thinking about price-to-earnings ratios or book value, you’d be mistaken…

“I am just dabbling. If all your friends are buying stocks and talking about it, and you don’t buy, then you have nothing to talk to them about.”
~ Liu Wei, age 32, real estate manager.

“I don’t know what stocks to pick. My friends just recommend them.”
~ Ms Li.
Source: The Wall Street Journal, April 2015

The corruption crackdown and visa restrictions mean it’s harder for Mainlanders to head south of the border and gamble in Macau these days. But the brokers will happily take all the chips you want to put on the stock market table.

Just take a look at the chart below. It shows the number of new brokerage accounts opened in China on a weekly basis.

For the week ending April 10th, there were just under 1.7 million new brokerage accounts opened. In one week!

New brokerage accounts opened in China by week from August 2007 to mid April 2015

So, for the vast majority of market participants, fundamentals are not relevant. As such, price action becomes a function of policy and speculation.

The million dollar question:
Is this a bubble that’s about to burst?

Mainland China is still the Wild West when it comes to equity markets. That much should be clear.

Six months from now, the market could double up or be down 50%.

This may not be a valuation bubble, but it’s clearly a speculative bubble driven primarily by massive retail market turnover with an appetite for a quick buck.

What we’ve seen in the past is that this market can fall just as quickly as it rises.

What keeps me long this market is there’s plenty of continued policy support on the horizon (i.e. cutting bank reserve ratios, liquidity injections etc.).

We’ve said that consistently.

The real economy is slowing, and house prices might be falling, but easing policies can always keep driving equity prices upwards.

Right up to the point where they don’t…

So what do you do?

China’s “A” share market (China companies listed in China and available for Mainlanders and, in many cases now, foreigners to purchase) has surged over 70% in 5 months.

The shares of China companies listed in Hong Kong, “H” shares, have lagged behind their parent companies (and others) in China. They’re up around 40% over the same period, but around half of that upside has come in the past couple of weeks alone.

I’m staying cautiously long the A-Share market along with both the H-Share and local Hong Kong market (which are starting to play catch up respectively).

BUT… there’s absolutely zero room for complacency here on the A-Share market in particular.

This market can whipsaw very quickly. We’ve seen it before and I guarantee we’ll see it again.

Bear in mind you are TRADING the Mainland China market… you’re not investing in any traditional sense. Welcome to the biggest casino in town!

And please watch your trailing stops like a hawk.

Good investing,


Our Newest Reader?!?

John Key I’ve been reliably informed that New Zealand Prime Minister John Key was personally handed a printed copy of our latest edition of The Churchouse Letter “A Hidden Opportunity at the End of the Earth”.

Usually I’m not wildly excited about subscribers sharing our publication, but in this case I’m happy to make an exception (and glad that the copy went to the current New Zealand PM and not his predecessor Helen Clarke… subscribers will know what I mean!)

The only thing worse than feeling like you’ve ‘missed the boat’ on an investment, is getting on a boat that’s already fully boarded and could capsize at any moment.

I’m not saying the Mainland China market ship has sailed over the horizon yet, but given the staggering bull run, it ain’t a conviction buy right now…

But don’t worry! We don’t just cover China. In fact we currently have 30 open positions across global markets in The Churchouse Letter.

As of mid-April, 28 of these positions are positive.

And on average we’re giving our subscribers DOUBLE DIGIT gains…

Our 50 day risk-free money back guarantee means you can subscribe and decide for yourself.

Peter Churchouse is a widely respected analyst and commentator on financial markets with well over 3 decades residing in Asia. He spent over 15 years as Asia Strategist and Head of Research for Morgan Stanley as well as running a hedge fund. He shares his knowledge, insight and investment recommendations through his subscription publication The Churchouse Letter, along with his free newsletter Peter’s Perspective.

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