Last week, the #HongKong HSI index was up 5.5% despite only having 3 trading days due to the Chinese New Year holidays. #China index futures were also up ~3% in the same timeframe. Trading is about to resume in mainland #China along with all the country’s business activity after the long holiday break. It’s pretty obvious that #stocks are going to trade higher right out of the gates (and if that doesn’t happen, then there must be something pretty wrong happening).
Who bought #HongKong and #China #stocks while everyone here was on holiday and couldn’t care less about markets? Foreign investors. But what kind of foreign investors? The answer is: Hedge Funds and US Retail.
As you know, I just spent almost 2 weeks in #China for the holidays. This time, I was in the countryside of the province of Shandong. From #Beijing to #Shanghai, from #Zuhai to #Jinan, from #Shenzhen to #Chongqing and #Binzhou in #China, you can feel the economy isn’t booming, but at the same time, it isn’t that bad either as western MSM badly want people to believe. Surprisingly, people there don’t really talk much about #stocks or trading to be honest, while in Europe and the US, it almost feels like everyone’s first thought when they wake up in the morning.
I’ve said many times that a bottom should be called when no one is willing to touch #stocks, even using a 10-foot pole. At the moment, that’s pretty much the situation in mainland #China. Institutional foreign investors threw in the towel on #China a long time ago, but foreign retail and hedge funds look far from doing so. However, even if their flow is enough to move the needle a bit (mostly because of 1-100 options leverage), it clearly isn’t enough to turn the tide by itself. Overall, we can confidently say the vast majority indeed doesn’t want to touch China #stocks even with a 10ft pole considering we are now at the point that those who buy EM ETF pick those without China #stocks (Pic below – credit to Financial Times 😬).
The Chinese government clearly drew a line in the sand at 3,200 and 15,000 for $CSI and $HSI indexes respectively and yes, they definitely have the weight and all the interest to turn the tides here. However, there are 3 elements you should consider:
1- The China “national team” tried to defend higher levels several times in the past year. Every time, it was only temporary and if anything, it offered exit liquidity to all those that were trying to get out. Foreign institutions surely stopped buying, but at the same time, they still hold billions of assets in #Chinese #stocks and I don’t think at all they are done with selling them.
2- The Chinese government only cares about social stability and common prosperity. Frankly speaking, this is what you see overall in China at the moment. As I mentioned in this post before (JustDario), those who are struggling are the 🐢🐢🐢 that, after coming back to their motherland, figured out that piling up on consumer debt and not putting aside any savings doesn’t work very well in #China. All in all, the Chinese government’s goal is to stabilize markets, not to prop them up since ultimately it’s a double-edged sword as they learned very well in 2014-2015.
3- China #stocks aren’t insulated at all from global markets. Ironically, a lot of bubbles out there have been inflated by Chinese money. From #Japan to US #stocks, from #Canada to #Australia real estate. Do you expect #China #stocks to go up and swim upstream like salmons while everything else implodes (like it always happens)?
Many people last week asked me if the bottom is finally here for Chinese stocks and if it’s time to let the #FOMO run loose. Personally, I see one last leg down, perhaps the most painful one, and not because of #China issues this time but as a consequence of what’s about to happen elsewhere. 🤷🏻♂️