Chinese lessons to be learned as the market matures

By Jade Fu, Investment Manager, Heartwood Investment Management

The Chinese ‘A’ share (onshore) market started to look interesting to us when the Shanghai-Hong-Kong-Connect programme opened last November to provide more access to foreign investors and so we invested in our higher risk strategies.

It was a deliberate decision, expressing a positive view on China with the understanding that the ‘A’ share market was not as developed and mature as the offshore market. Despite the significant market fall since early June, the onshore market is more than 50% higher from the announcement of that programme and 100% higher from the cycle low of March 2014.

Many investors are justifiably questioning the tactics of the Chinese government’s intervention into the onshore equity market. We acknowledge that some policy actions are concerning; specifically, the ban on major shareholders to liquidate stocks and the pressure on private investment banks and fund managers to buy the market.

Other steps to curb margin trading and to inject liquidity were probably necessary. Arguably, the purchasing of the stock market on the part of the central bank, sovereign wealth funds and state pension funds is not so dissimilar to programmes that have been followed in other major developed economies.

Clearly, there are lessons to be learned. The government’s tactics have been counter-productive and have undermined confidence among foreign investors. Due to the significant volume of leverage in the market and the largely retail investor base, the sell-off has become self-reinforcing, which has prompted aggressive policy actions.

In spite of events, we have not changed our positive long-term investment view on China. While the authorities are facing new challenges as the market infrastructure matures, we believe that they have strong tools to manage the real economy; for example, there is plenty of room to cut interest rates.

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