The death of China's leader Deng Xiaoping lit a fire under the Hong Kong and Chinese markets, underscoring what many investors already believed: President Jiang Zemin has a grip on power in his country, for now.
Mr. Jiang, in turn, is expected to continue the economic policies that have re-energized China.
Hong Kong's Hang Seng index, which had been down for 1997 before Mr. Deng's death on Feb. 19, increased 2.33% on Feb. 20. Between Feb. 19 and Feb. 26, the index was up 3.3%, to 13541.8. Class A shares trading in Shanghai and Shenzhen fared even better.
Some institutional investors couldn't act fast enough. "I was looking for a buying opportunity on news of Deng's death. That didn't happen because the markets rallied" too quickly, said Jacqueline Chen, investment director, WorldInvest Ltd., London.
Emerging Markets Investors Corp., Arlington, Va., also was unable to take advantage of the markets' brief dip. "We heard about (Mr. Deng's death) in the middle of the night, Hong Kong time. We put out buy orders if prices (declined to) certain levels. But because they didn't, the orders did not get executed," said Debbie Farrell, the firm's manager of Asian investments.
Ms. Farrell echoed a widespread view that would have seemed surprising several years ago: Any sharp downturns in the Chinese and Hong Kong markets over news of Mr. Deng's death were unlikely to last.
"There is a nuance of difference" now that Mr. Deng is gone, but "nothing so dramatic that it would change the landscape," she said.
Money managers noted Mr. Jiang - Mr. Deng's chosen successor - had time to consolidate his power, thus curbing what could have been a leadership power struggle.
But the power tugs seem far from over. Mark Headley, managing director, Matthews International Funds, San Francisco, noted the 15th Chinese CommuSee China on page 41Continued from page 3
nist Party congress, scheduled for this fall, has become more interesting because leftists might see it as their "last chance to regain power." While this faction isn't likely to succeed, they could try behind-the-scenes positioning in the months before the congress, he suggested.
Mr. Jiang himself might not prove to be an enduring leader. Not only does he lack the clout of Mao Tse-tung and Deng Xiaoping as Long March veterans and military heroes, but he also faces problems that clearly will test his mettle. Two major economic issues center on China's maintenance of economic growth with low inflation and the plight of China's ailing state enterprises. Another issue will be how smoothly Hong Kong is returned to Chinese rule.
To Robert B. Oxnam, senior adviser to Bessemer Trust Co., New York, and former president of the Asia Society, Mr. Jiang could prove to be a transitional head. "Some analysts, including me, think another leader could emerge in the next two to four years," Mr. Oxnam said. Among the possible names: Qiao Shi, chairman of the National People's Congress and possibly economic czar Zhu Rongji.
But Mr. Oxnam and many others believe that, whoever they are, China's leaders will remain what Mr. Oxnam calls "economic pragmatists." And the investment climate in Hong Kong and China will continue to be inviting. As Mr. Oxnam put it, "China in the late 1990s is likely to hold some decent investment opportunities. In part, that's because of continued growth in a more prudently operated economy than in the early 1990s, and partly because of the larger number of China investment vehicles, not only in the PRC, but in Hong Kong, New York and other financial centers."
Indeed, some would argue that even after the Hong Kong market's run-up of late, it remains a buying opportunity.
Christopher Wood, Asia and emerging markets strategist for Peregrine Securities, Hong Kong, believes the buying opportunity in Hong Kong remains. By the first quarter's end, he sees that market's price-earnings ratio rising to 16 times forward 1997 earnings from about 13 now, which would lift the Hang Seng index to about 15,200.
"The market is in the process of discounting a smooth handover of Hong Kong to the Chinese" on July 1, he explained. Another positive is the spillover effect of U.S. interest rates. "My view," said Mr. Wood, "is that U.S. interest rates won't be raised anytime in the foreseeable future."
Of course, not everyone sees quite so much steam in the Hong Kong market, and some investors trimmed back Hong Kong positions early this year after the market's 34% surge in 1996.
In a report dated last week, ING Barings in Hong Kong said: "While .*.*. the effect on the market from Deng's death may end up to be a non-event, the market's rally is not expected to be sustainable. Institutions which decided to reduce their overweight positions on Hong Kong will continue to trim their holdings if the market bounces back to beyond 13,500. As a result, we may see the market dragging back to 13,000 over the next few weeks before we see some excitement during the (earnings) results season."
Gisele Edwards, investment analyst, Gartmore Investment Management Ltd., London, said although her firm has been overweighted to Hong Kong for some time, it took some profits and has become "slightly less overweighted in the past month or so." From here, the firm "might have to keep an eye" on Hong Kong's red chips, a sector where Gartmore is overweighted. "Some of their fundamentals have yet to be proved. Their prices have been pushed up on speculation because they have mainland China backing. It's assumed their mainland China parent will inject assets into them that will provide earnings, But as of now, that's just a promise. We'll have to see which promises materialize," she said.
Edinburgh Fund Managers, Edinburgh, Scotland, remains positive on Hong Kong. Edinburgh also did some profit-taking, modestly trimming its exposure to the property sector.
Lloyd Beat, a managing director for North America, said Hong Kong's weighting in Edinburgh's broadly based Pacific fund dropped to 37.5% now from 42% at the end of December; in EAFE portfolios, Hong Kong is about 7.2% vs. 8.2% at year's end.
Marvin & Palmer Associates, Wilmington, Del., also scaled back. It sold one property company stock, which slimmed its Hong Kong weighting to 5% from 6.5% in a global portfolio and to about 9% from 10.5% in EAFE-type accounts. Executives would not identify the stock.
Nonetheless, senior managing director Bill Dodge said the firm remains heavily overweighted to Hong Kong. "If you look out over the next six to 12 months, you'd want to own Hong Kong (stocks)," he said.
"China's transition to new leadership is set, because there has been plenty of time to prepare for it," he said.
What's more, Hong Kong's "reintegration" into China necessarily has to be smooth to draw Taiwan back to the fold. In general, he sees "China pursuing all policies with the idea of achieving social and political harmony."