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No bubble in China despite 200% in a year, says Mathews Asia

22 May 2015

Mathews Asia’s top strategist says investors should not lose their nerve in this soaring market.

By Daniel Lanyon,

Reporter, FE Trustnet

Chinese stocks are not in a bubble despite a huge rally in its core stock market that has seen a near 200 per cent return over the past year, according to Andy Rothman, investment strategist at Matthews Asia.

Chinese equities have rallied since June 2014 and this has only accelerated in 2015 following the government’s move to liberalise the investment market through measures such as the Shanghai-Hong Kong Stock Connect programme, which allows greater access to trade mainland China and Hong Kong-listed stocks

The onshore China A shares market, which is generally the domain of domestic investors, has also been particularly helped by combination of this financial market liberalisation, monetary policy easing and improving investor appetite.

According to FE Analytics, the Shanghai Stock Exchange A Share index is up 186.56 per cent over one year and the MSCI China is up almost 50 per cent.

Performance of indices and sector over 1yr

Source: FE Analytics

However, Rothman believes that, despite a host of worries over the Chinese economy at the same time equity markets have rallied so hard, there is a logical explanation as to why this does not constitute a bubble. He argues that the rally is built on China’s enormous household savings rather than debt.


“Has the stock market gotten ahead of itself? Is it a bubble? I'm a little bit at sea when I question bubbles become it is one of those terms where there is no consensus definition. For me they are about leverage,” he explained.

“If the pricing of anything goes up dramatically and there is not a lot of leverage then I am hesitant to call it a bubble because typically we would worry about the consequences of a sharp fall in those prices. But if it is not leveraged very much then consequences are relatively limited – just to the individuals that bought those products rather than spill over to the overall economy.”

“You could argue that it is weird that in the last six months the A share market has gone up dramatically while everything in China is decelerating – including corporate profitability.”

However, he adds that this is simply a sharp return to form for China stocks, which since the 2009 post financial crisis nadir in equity markets have underperformed – until the latter stages of the recent rally.

This underperformance – until about three months ago – is shown clearly in the graph below.

Performance of indices over 6yrs

Source: FE Analytics

“I think the reason for this is catch up. Over the last five years or so China has had one of the best performing economies in the world, if not the best, but it has also had one of the worst performing stock markets in the world and now the  stock market is starting to play catch up,” Rothman said.

“It does seem a bit abrupt that it is doing all that catch up in just six months and we'd all prefer if it had been a bit more gradual and steady over time. While there are certainly a handful of stocks that you can identify that have raced ahead too quickly, I would say overall we are still in the catch up phase.”

“There is more room for it go on. We also have to look at the detail, so for example industrial profit growth in China has been terrible this year but this is mainly at state-owned enterprises while profits at privately owned industrial firms are up.”

He says it is a misconception that the rally has been funded by borrowed money rather than a latent pool of household savings.


“If you look at household bank accounts – so just households, not businesses – it’s the renimbi equivalent of $8trn,” he said.

“To put that in context, it is bigger than the combined GDP of Russia, Brazil and India – so when people ask how the Chinese can afford to buy a car or a house or where the liquidity is coming from for the Asia rally, it’s not that they can only afford one of these things."

Rothman adds that there is a wide disparity in the performance of stocks as well as firm’s profitability. This was also evident this week the near 50 per cent plunge in solar energy firm Hanergy in just one day’s trading.

“Profits in mining, oil and gas, iron ore are down dramatically but profits at companies manufacturing computers, telecoms equipment and electrical machinery are up.”

“Just relying on the broad index is going to make it very difficult – that's not going to keep going up and up.”

Portfolio managers Nick Roberts and Tony Lanning, who run the JPM Fusion Fund range, also moving toward a greater China exposure.

“There is a particularly high level of interest in China at the moment as investors are increasingly optimistic about the potential for the People’s Bank of China to introduce their own measures of monetary easing and fiscal stimulus as the economy slows,” Lanning said

“We have added Chinese equities through the GAM Star China strategy [managed by Michael Lai] at the start of the month following a recent visit to the region and on the back of a correction in the market. Between one and five percent has been added across the Fusion Fund range, as we like GAM Star China’s tilt towards cyclical names particularly the banks.” 

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