In our write-up dated June 22nd (http://tinyurl.com/sycee), we shared our view that a correction in
general is healthy for capitalmarkets. The Shanghai market up to its recent peak in mid-June, rallied
112% without any consolidation. So, a healthy correction was long overdue. This round of liquiditydriven
rally in the A-shares market has led stock prices to climb to unreasonable levels with
valuations that detach from fundamentals. It is therefore normal that market forces will drive asset
prices back to their intrinsic value level.
The recent sharp decline was triggered by the initial curtailment of margin trading mandated by the
government and then exacerbated by deleveraging en masse. In other words, highly leveraged
margin accounts were forced to liquidate, leading to an across-the-board decline, which in turn
triggered further liquidation. Initially, the government underestimated the ripple effect of margin
deleveraging. However, at the time of this writing, the Chinese central bank, PBoC, together with
various government agencies, announced a series of measures to provide liquidity support and to
stabilize market expectations. As an example:
- 1. PBoC will “provide liquidity assistance” to China Securities Finance Corp (CSF) to enable
it to better play its role in financing securities trading and propping up the A-shares market;
- 2. CSF will extend RMB260 billion (US$42 billion) of credit lines to securities firm which can
then make loans to investors to buy stocks;
- 3. China Insurance Regulatory Commission (CIRC) will increase the threshold to 10% from
5% of the investment in a single blue chip company by the insurance companies;
- 4. China Securities Regulatory Commission (CSRC) will allow major shareholders to increase
stakes in listed companies of SOEs without approval.
This enhanced policy support is in line with our expectation that the government will impose a
“policy put” in order to prevent unintended, widespread financial system risk. We believe that the
correction will be contained and stabilized in the near future. At this juncture, perhaps what is more
important is to balance the current bearish viewpoint with a review of the current state of the Chinese
economy. We believe that fiscal and monetary policies will continue to be accommodative so as to
sustain an economic recovery. Furthermore, with active brokerage accounts being less than 10% of
Chinese households, we believe that the overall impact of the recent sharp decline on consumer
spending will be insignificant.
Post correction, Chinese equity has now become more attractive, e.g., MSCI China now trades at
9.2x on a 12-month forward P/E, at a 22% discount to its 10-year average. The A-share benchmark
CSI300 now trades at 13.5x on a 12-month forward P/E, at 9% discount to its 10-year average.
Looking forward to the remainder of the year, we will continue to closely monitor the market
recovery, policy actions and buying opportunities in the capital market.
We continue to be optimistic about a Chinese economic recovery and deem current market valuation
Greece has been an issue ever since the foundation of the EU and the adoption of a single currency.
Much of the data regarding its eligibility had been a problem. Greece’s admission to the Union was
a matter of political convenience on the part of all parties rather than solid eligibility.
Simply put, Greece never was able to repay its debts, and the EU led by Germany was always willing
to provide another Band-Aid. Now it has come to pass that in trying to employ the same tactic one
more time, Mr. Tsipras has discovered that there is a line in the sand, and Chancellor Merkel and
the rest of the EU stand resolute in demanding austerity on the part of the Greeks. Therefore, the
issue at hand has very quickly shifted from economic to political. It is hard to see how the Greek
people can endure sustained austerity and self-sacrifice.
On the other hand, Chancellor Merkel and her allies are also a little bit behind the eight ball. General
elections are set for the fall in Spain and everyone is fearful that what happens to Greece may likely
be a precursor for Spain.
In the meantime, in his game playing, Mr. Tsipras has resorted to exchanging frequent phone calls
with Mr. Putin in Moscow. The West, in general, is fearful of Russia being brought into the fold
under any circumstances. It would appear ghastly if Russia were among the first to provide
emergency humanitarian aid to the Greeks.
So at this eleventh hour, it is still likely that the EU will be the one to blink first and accept the terms
proposed by the Greeks. Such an agreement to austerity and the restructuring of debt by the Greeks
is a charade, but it would permit both parties to “save face.”
The promise of austerity that can never be fulfilled and the prospect of restructure would put off the
necessary hard decisions for another day.