25 October 2016
China's 'one belt, one road' and 'China Manufacturing 2025' initiatives should help its exporters. Photo: Xinhua
China's 'one belt, one road' and 'China Manufacturing 2025' initiatives should help its exporters. Photo: Xinhua

Why global funds may have underweighted China

China’s economic data is mixed, and both the mainland and Hong Kong markets are consolidating and have yet to surpass their 2007 peaks.

However, China still has several economic stimulus programs that it has yet to implement, such as the “one belt, one road” initiative and “China Manufacturing 2025”, which would help Chinese firms expand into foreign markets.

For example, the Bank of China has established branches in member countries of the Association of Southeast Asian Nations.

If the stock link between Shanghai and Germany materializes, the bank may need to set up a renminbi settlement business in Germany and enable Chinese firms to tap into markets like it.

Many foreign investors are still skeptical about Chinese stocks. They may wait for a correction before jumping in.

China has become the best-performing emerging market this year.

A shares have posted gains since last August, and the Shenzhen market has doubled this year on the back of various government policies and monetary easing measures.

Investors should increase their holdings in A shares.

The mainland market is likely to rise further in the second half, and many emerging markets funds have lagged behind the benchmark because they have underweighted the Chinese market.

They may rush to catch up for the rest of the year, otherwise they will face huge redemptions by year-end.

If so, the annual bonus of the fund managers will drop sharply, or they could even be fired.

China-dedicated funds have already witnessed net fund inflows for last two weeks.

In the week to May 31, China funds reported net inflows of US$4.58 billion, the highest in a decade.

As the Economist noted, risk is mounting for A shares

Also, Credit Suisse said A shares are 23 percent overbought.

I guess investors on the sidelines have already sold off their A shares and H shares after reading such reports.

But there will be huge fund inflows into the Chinese market in coming months, as many fund managers are eager to catch up with the impressive rally.

Slow growth in Japan, India

In Japan, inflation fell back to zero in April, reflecting weak consumption.

Meanwhile, the unemployment rate dropped to 3.3 percent, the lowest in 18 years, and industrial output gained 1 percent month-on-month.

However, household spending declined by 1.3 percent, after the Japanese government increased the consumption tax in April last year.

Japanese policymakers are scratching their heads, as consumers are still reluctant to spend money despite the improving job market, rising equity market and falling oil price.

Would that have anything to do with natural disasters like earthquakes or volcanic eruptions?

India’s central bank cut the overnight lending rate by a quarter percentage point to 7.25 percent Tuesday in an attempt to restore momentum in economic growth.

First-quarter gross domestic product expanded by 7.3 percent, falling below the expectation of 7.5 percent.

The size of India’s economy reached about US$2 trillion, still far below China’s US$10 trillion, and hence India has limited contribution to make to global growth.

This article appeared in the Hong Kong Economic Journal on June 4.

Translation by Julie Zhu

[Chinese version中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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