On morning of 17 November, while Western investors
were sleeping, China opened the door to its investment world. On that
day China began two-way trading between the Shanghai and Hong Kong stock
exchanges. This development essentially opened the Chinese stock
market to investors around the world through Shanghai-Hong Kong Stock
Connect. They said to investors around the world, “Welcome, just bring
your money and come right in.”
Investors would be well advised to be aware of the money flowing
into the Chinese stock market, and possible ramifications of that money
movement.
Money is like water flowing across the earth, it fills in the low
spot. To foreign investors, and in particular dollar-based
institutional funds, the Chinese stock market is a “low spot” to be
filled in with money. Foreign investors will fill that “low spot” with
their money. Institutional money managers cannot ignore the most
important economy in the world, and one destined to be the largest. As
the chart at right portrays, the cumulative dollar flow into China’s
stock market is off to a good start. At present the daily limitation on
investment money inflow is 13 billion Yuan, or roughly $2.1 billion,
per day. Actual money flows have been below that limit, but it is just
the first week of the rest of time. Note especially that we only have a week of data, and the discussion that follows is about trends that will unfold over time.
In order to buy Chinese stocks one must have Renminbi to pay for
them. To a dollar-based investor that means selling dollars and buying
Renminbi. Those transactions should put downward pressure on the dollar
and upward pressure on the Renminbi. While a myriad of factors will
influence the value of the Renminbi, this money flow, which will be
massive over time, will contribute to the secular uptrend in value of
Chinese Renminbi already in place. Second chart above portrays the
cumulative money flows into Chinese stock market with dollar value of
the Renminbi. As that black line is rising, the Chinese currency is
appreciating and the dollar is depreciating. While our focus here is on
the dollar, other currencies, such as the Euro and yen for example,
will come under similar selling pressure.
As money flows out of dollars and other currencies, the value of Gold
in those currencies should rise. In the chart to the right is plotted
the cumulative flow of money into Chinese stock versus price of
US$Gold.
Another question that arises is from where will this money come.
Near all the money flowing into Chinese stocks will come from
institutional funds of all kinds, especially U.S. based speculative
funds. While we know not from where in their portfolios money for
purchases of Chinese stocks will come, one clear candidate for a money
source is the NASDAQ traded issues. Many of those stocks are over owned
in institutional portfolios. In the bottom chart is plotted again the
cumulative money flow into Chinese stocks verus the NASDAQ Composite
Index, left axis.
In reviewing this situation several possible strategies present
themselves for consideration by investors. With a money flow over
coming years into Chinese stocks that will be measured in the hundreds
of billions of dollar, buying Chinese stocks is clearly one
possibility. For a variety of reasons, this approach may not fit many
individual investors. Hong Kong exchange may be more viable and
friendly route.
Second, consideration should be given to investing in the Chinese
Renminbi as it is likely to rise in value versus your home currency.
Most desirable route is through a Renminbi denominated bank deposit.
These accounts are available through many banks around the world and on
the internet. In U.S. banks those deposits are insured. Exchange Traded
Currencies (ETCs), a form of ETF, are also available. However,
investors should probably avoid Exchange Traded Notes (ETNs).
A third alternative should be obvious from the above discussion.
Gold is a form of currency that moves opposite the value of national
currencies. Dollar and most other national currencies should depreciate
versus the Chinese Renminbi. That action should add support to the
value of Gold in those currencies. For many, this investment route may
be more comfortable than the previous two.
Finally, note that the above prognostications are the future, a time
period measured in years. They are not forecasts of what might happen
tomorrow afternoon. We prefer you become wealthier over time rather
than feed the hope for one lucky trade. Ned Schmidt, CFA www.valueviewgoldreport.com
Follow us @vvgoldreport
Oct. 6 (Bloomberg) – Bloomberg’s Stephen Engle reports on the World Bank
lowering its growth forecast for East Asia for the second time this
year, citing the slowdown in China for downgrading expectations. He
speaks to Angie Lau on “Asia Edge.” (Source: Bloomberg)
The World Bank lowered its forecasts for growth in developing East
Asia this year and next as China’s expansion moderates and policy makers
brace for tighter global monetary conditions.
The region is
forecast to grow 6.9 percent in 2014 and 2015, down from 7.1 percent
projected in April, the Washington-based lender said in its East Asia
and Pacific Economic Update released today. China will expand 7.4
percent this year and 7.2 percent next year, compared with 7.6 percent
and 7.5 percent previously forecast, the report showed.
Data
released last month showed China’s industrial-output expansion at its
weakest since the global financial crisis, while moderating investment
and retail sales growth underscore the risks of a deepening economic
slowdown led by a slumping property market. Significant uncertainties
remain that could affect the region’s growth including downside risks in
the euro area and Japan, a sharp tightening in global financial
conditions and international and regional geopolitical tensions, the
World Bank said.
“The best way for countries in the region to
deal with these risks is to address vulnerabilities caused by past
financial and fiscal policies, and complement these measures with
structural reforms to enhance export competitiveness,” Sudhir Shetty, the World Bank’s East Asia and Pacific chief economist, said in a statement.
Photographer: Brent Lewin/Bloomberg
A bicycle rickshaw driver passes by the Bell Tower in Beijing. China’s growth is... Read More
Growth in the region excluding China is expected to
accelerate to 5.3 percent in 2015 from 4.8 percent this year as a
gradual recovery in high-income economies boosts demand for its exports,
and domestic economic reforms advance in the large Southeast Asian
economies, the World Bank said.
Exports Boost
It
raised its forecast for Malaysia’s 2014 growth to 5.7 percent from 4.9
percent in April because of robust exports in the first half, it said.
The surge in shipments helped growth in the economy unexpectedly
accelerate to the fastest pace in six quarters in the three months
through June from a year earlier.
China’s growth is expected to
slow as the government implements policies to address financial
vulnerabilities and structural constraints, the World Bank said.
As
it seeks to strike a balance between containing risks and meeting
growth targets, structural reforms in sectors previously reserved for
state enterprises and services could help offset the impact of measures
to contain local government debt and curb shadow banking, the report
showed.
Protests in Hong Kong will probably slow growth there
this year but haven’t so far had a significant impact on China’s
economy, Shetty said today.
Trade Flows
The world’s second-biggest economy was the top trading partner for the 10-member Association of Southeast Asian Nation’s last year, according to data from the Asean-China Centre.
The
World Bank also cut its forecasts for Thailand’s growth this year to
1.5 percent from an earlier estimate of 3 percent. The country’s junta,
which seized power about four months ago in a coup, has said it will
stop buying farm products directly from growers as state purchases spur
overproduction, distort the market and create stockpiles.
The
country needs to pursue further fiscal reforms following the scrapping
of the rice-pledging scheme and proposals including the revision of
property income taxes warrant serious consideration by the new
government, the World Bank said.
World Outlook
The
global economy is showing signs of recovery, albeit at an uneven pace,
while significant uncertainties remain regarding the strength and
sustainability of the recovery in high-income economies and about the
timing of policy actions by central banks in these countries, the World
Bank said.
The world’s growth is forecast to be 2.6 percent growth in 2014, and an average of 3.3 percent from 2015 to 2017, it said.
“In
this uncertain global environment, there is still a window of
opportunity to enact critical, and in some cases overdue, reforms,” the
World Bank said in its report. “The short-term priority in several
countries is to address the vulnerabilities and inefficiencies that have
been created by an extended period of loose financial conditions and
fiscal stimulus.”
To contact the reporter on this story: Sharon Chen in Singapore at schen462@bloomberg.net
To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Brett Miller, James Mayger
