If you like risk, then boy do Chinese brokers have a product for you.
Two weeks ago, People’s Bank of China governor Zhou Xiaochuan told a gathering of Finance Ministers and central bankers at the G-20 meeting in Turkey that the current volatility in China’s mainland equity markets has worked itself out. Not quite. The Deutsche X-Trackers China A-Shares (ASHR) exchange traded fund is down nearly 7% in the last five days. And a recent poll of Barclays Capital clients shows that most fund managers are underweight China.
According to their survey, some 716 investor now see a weakening China as the main risk to financial markets over the next 12 months. Investors are also bearish on China’s near-term growth prospects, with close to 40% of them saying China growth is most likely to surprise to the downside over the next 12 months.
The majority of survey respondents also believe the official Chinese growth numbers are overstated. Beijing said its economy will grow at 7% this year. It’s one of the only major economies in the world, if not the only one, that nails its economic forecasts on the dot year over year.
More than 60% of respondents who think China overestimates its numbers say they do so by as much as two percentage points, putting China output at around 5%. The question is whether China can maintain its off-record “full employment” strategy with growth now at less than 40% of where it was during the height of the Chinese demand boom in the early 2000s.
Worse yet, there is growing perception that a ” financial accident” in China may occur in the next two years, with close to one half of respondents giving it at least a 25% probability, up from only one-third two quarters ago. The hard landing pundits are doing their job selling their view to the big three financial news outlets: Bloomberg, CNBC and WSJ. Congratulations, you’ve got yourselves some buyers.
Most investors fully expect downside in China-linked assets, including emerging market nations dependent on China, like Brazil.
Some 45% of investors said they viewed last month’s selloff as part of an ongoing correction in China. On the plus side, nearly a third said that the correction will be a short-lived and a healthy one as China’s stock market matures. But another 30% see it as start of a wider correction in risk assets, of which China plays a big part. Long only investors, who account for 44% of respondents, are less bearish than leveraged and short sellers.
Chinese authorities have spent nearly $236 billion propping up their market since the rout began in June. Trade data from China continues to disappoint, killing momentum.
“As long as the S&P is below 2040 points, then its risk off,” says Adam Sarhan, founder and CEO of Sarhan Capital in New York, a boutique investment advisory and research firm. “If we break below that, we are going lower and that will not be good for risk assets overall.”
Despite the material correction in China-related assets, more than half still say China is too expensive. Under 10% said China equities were cheap.
Investors believe oversupply is China’s main economic problem.
Premier Li Keqiang recently restated that last month’s currency adjustment was linked to reforms intended to put China on track for inclusion in the International Monetary Fund’s basket of currencies. That inclusion is not expected this year, but it weakened the yuan from 6.13 to the dollar to 6.36 almost overnight. It’s been range bound since and has yet to weaken below 6.40.
Some emerging market specialists will say China has plenty of tools to sustain the economy as it transitions away from an export-driven economy to a domestic one . But investors are losing their patience with China.
Its not all clear for risk-off, however. China may rebound, even if it is short lived.
“This is a Fed-driven market now,” says Sarhan. Investors are waiting for this week’s news on monetary policy from the Federal Reserve. “Usually when the market tops out, multiples on the S&P are in the 20s. But now we’re still in the mid teens. So in theory we can go higher. Those are the only potential bullish catalysts because, let’s face it, you have a global economy that’s not growing…and it’s not growing at near zero interest rates.”
Lower interest rates in the core economies, coupled with a mini-QE in China, have not helped the demand side. In China, the supply side stuck i over capacity is a strong headwind.
Ronnie Chan, Chairman of Hang Lung Properties, a multi-billion dollar real estate developer based in Hong Kong, warned FORBES this weekend, “I’m not sure Beijing knows how to solve this problem. They are struggling.”