Stock markets in China have performed strongly despite the weak fundamentals of the economy. Towards the end of March, the authorities loosened stock market restrictions and for the first time allowed mainland Chinese insurance companies and mutual funds to buy H-shares listed in Hong Kong. The Hong Kong stock market rallied on the back of buy flows from mainland China and, in particular, investors sought dual-listed shares (shares listed on both the Hong Kong and Shanghai stock exchanges) some of which trade at a cheaper valuation in the Hong Kong market.
Meanwhile, sharp moves in the Shanghai stock exchange also look unsustainable, although we believe speculative flows will remain for a while. Whereas in developed markets institutional investors usually make up roughly 80% of total and retail 20%, in China it is the opposite. The Shanghai stock exchange is very retail driven and newsflow driven and thus by nature volatility would be relatively high. In the shorter term, we see elevated risks in the Chinese system, and a lot of the measures put forth by the government are moving the country away from the path of rebalancing the economy and instead steering the country back towards the investment-driven model that prevailed for the past decade.
Amy Leung – Newton, a BNY Mellon company