International investors shrug off China bubble fears

Concerns have resurfaced about a bubble building in China's stock market, but international investors appear relaxed about the possibility of a correction.

Their confidence comes despite explosive growth in China's mainland stock market, which has more than doubled in size over the past 12 months. The Hong Kong-listed H-shares market has risen by a third over the same period.

Vanessa Donegan, head of Asian equities at Columbia Threadneedle, the fund house, admits dangers could be lurking, given the rapid rise in valuations. "The overseas investment community is cognisant there is a bubble building. One has to be quite careful," she says.

The share price rally has been driven in part by Chinese retail investors turning to the stock market following the clampdown by regulators last year on the domestic wealth-product market. This trend has accelerated due to fears about oversupply in China's housing market, pushing investors to shift their money elsewhere.

The extension of China's Stock Connect programme to include the Rmb5tn ($806bn) Chinese mutual fund industry in March has helped funnel more cash into Hong Kong. The programme was introduced last November to allow investors in Hong Kong and Shanghai to trade in each other's markets, but was initially only open to wealthy retail investors.

Ms Donegan says: "Often a rising tide of liquidity can lift all companies, bad and good, and [the share price of] China's [state-owned enterprises] can move up pretty dramatically just on the idea of some reform."

She joins a number of international fund managers who believe China's share-price rally has some way to go, despite the country's decelerating economic growth.

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Helen Zhu, head of China equities at BlackRock, the world's biggest fund house, is particularly positive on Hong Kong-listed mid-cap banks, as well as property and utility companies. She is less convinced by companies in construction, capital goods, transport and energy.

Investor faith is underpinned by the fact that China's government is expected to carry out a radical overhaul of its state-owned assets, forcing companies in areas such as oil and banking to consolidate and list on public markets. The total number of state-run businesses could fall from around 140 today to a dozen, according to James Chong, Greater China director at Martin Currie, the Edinburgh-based fund house.

Mr Chong adds that Chinese monetary policy has strengthened confidence in the stock market. The People's Bank of China last month cut the amount of cash banks must hold as reserves by one percentage point, to 18.5 per cent. Mr Chong believes further cuts are likely, enabling banks to lend more easily to companies and in turn propping up equity valuations.

Robert Horrocks, chief investment officer at Matthews Asia, the San Francisco fund house, says: "Some parts [of the stock market] are overheated, for sure.

"However, given the intensely bearish sentiment about China that we had going into this bull run, and the practical steps China has been taking to improve both its economy and the markets, I am sceptical of the immediate desire to write off the rally as just another bubble. There is still plenty of value out there if you pick the right names."

Other investors are more cautious but stop well short of displaying nervousness. Gemma Godfrey, head of investment strategy at Brooks MacDonald, the UK wealth manager, says: "Chinese stocks have further upside but the road ahead will be bumpy. With the strength of the dollar, the fall in commodity prices, and an eventual rate rise in the US, the outlook for emerging markets is tenuous."

Heinz Ruettimann, head of emerging market strategy research at Julius Baer, the Swiss private bank, adds: "Everyone is expecting a pullback in the stock market after such a good run. The question is how severe can this pullback be? It is difficult for investors to get a handle on what is cheap or expensive and there could be an accident in the property sector."

He believes that the government has the credibility and the room to manoeuvre to avoid a large negative event in the stock market. "[Beijing] has embraced pension and healthcare reforms and [an overhaul of] its state-owned enterprises. You really see a $10tn economy that is progressing," he says.

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