After the strong showing by the Shanghai exchange in
2014, we weren’t surprised recently to see so many China funds on the ETFG
Quant Movers report. It also got us thinking about whether investors looking to buy these international equities cheaply had already missed a good deal.
There may be numerous parallels between China in 2014 and
Europe in 2015: concerns over a weak banking system, sustainability of the
investment led GDP growth model and a once-a-decade political transition that punished the China A-share market for years and pushed share prices of many of the largest
banks below book value. Actions by the PBoC and the central government to prevent
major defaults in the high yield investment trust market (as well as opening
the A-share market to further outside investment) offered investors a guide map
to what policy actions investors could expect to
support the market while shifting the economy from an investment-driven to a
consumer driven model. But like their
European counterparts, it would be hard to call the A-share funds a good
bargain after their 53% run-up in 2014.
While the ETFG fundamental score for the largest A-share fund, the Deutsche
X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) is still attractive
relative to its own history, the trailing P/E of 14.72 is hardly a bargain.
Another factor to consider before taking the plunge into
a China fund is the currency peg between the Chinese Yuan and the U.S. dollar;
since the July 1st 2014 the U.S. dollar has gained over 30% compared
to the Euro but only .83% versus the Chinese Yuan as the PBoC works overtime to
keep the currency peg within its established trading range. That peg has helped support the strong rally
in the A-share market but investors relying on the Chinese Communist Party to
maintain the Yuan at its current levels might want to think again. While China’s trade surplus hit a new record
in February as rising exports to America help counteract the fallout from the
Yuan’s 30% appreciation versus the Euro, the PBoC’s balance sheet experienced a
major contraction last quarter as capital continues to flee the country and
forces the central bank to intervene to support the value of the Yuan.
Lastly, a current account surplus and capital account
deficit seem to be the natural order of things for the rest of the world, but
it has added another element of instability in China’s transition towards a
consumer-based economy. Given the size
and importance of China’s trade relationship with the EU, there is a
significant amount of debate as to whether China will continue to defend the Yuan
as its current levels or allow a one-time depreciation despite the concerns
that it could add further instability to the market.
Thank you for reading ETF Global Perspectives!
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