The patchwork quilt of measures China's government has taken since late June to prop up the country's plunging A-shares market is presenting overseas investors with opportunities as well as reasons to lose sleep.
Among the opportunities: The 33% plunge by Shanghai's composite index from the market's June 12 high through its recent low on July 8 — following an explosive, retail investor-led surge of 150% over the prior eight months — has raised the prospect of a return to more attractive valuations.
The market's “short-term correction” could be “a good opportunity for us to invest,” said Wu Yibing, head, China, with Temasek Holdings Pte. Ltd., at a July 7 news conference on the S$266 billion ($197 billion) Singapore-based sovereign wealth fund's latest fiscal year results. As of March 31, Temasek's investments in China came to roughly S$72 billion.
For now, the tug of war between a government looking to buoy the market and hordes of Chinese retail investors newly aware of the risks posed by the trillions of yuan of margin debt they took on in the market's runup will determine how big that window of opportunity could become.
The window closed a bit toward the end the week ending July 10, as the government tightened its grip on the market, effectively engineering a two-session, 11% bounce that saw the Shanghai index close at 3,877.80 on July 10 — but still down 25% from its mid-June high.
Meanwhile, the government's ever-expanding litany of steps aimed at boosting stock purchases and discouraging selling are presenting tactical openings for investors as well. (The latest additions include a six-month ban on sales by “insiders” holding more than 5% of a company's stock and an increase in the ceiling for insurance company equity allocations to 40% from 30% of their general accounts.)
For example, with hundreds of smaller-cap companies listed in Shenzhen and Shanghai having suspended trading in their shares as the market plunged, retail investors facing margin calls have been selling their holdings of H-shares — listings by mainland companies on the Hong Kong stock exchange — even though valuations there already are attractive, said William Fong, a Hong Kong-based portfolio manager with Baring Asset Management (Asia) Ltd. in a July 8 telephone interview. “We are quite excited to bottom fish there,” Mr. Fong said.
The Hong Kong-based head of China equity for one global money management firm, who declined to be named, said his firm is seeing a growing number of overseas investors with H-share exposure looking to add A-shares as well, but leaving it to the manager to decide which market to favor at any given time.
Gary Greenberg, the London-based head of emerging markets with Hermes Investment Management, said his team has compared the two and found companies listed in Shanghai and Shenzhen — such as Guangdong-based Gree Electric Appliances Inc. — far more entrepreneurial than the mature blue chips listed in Hong Kong.
With the market's retreat, Gree, with a return on equity north of 20%, has seen its price-earnings ratio drop to less than 7 from an already reasonable 10 — the kind of gem to be found in the A-shares market even as observers had warned that valuations there were getting frothy, Mr. Greenberg said.