To be sure, we’ve had our share of laughs at the expense of China’s margin-fueled equity mania. First there was the realization that more than 4 million new stock trading accounts were created in China last month alone — the country is now adding [4] nearly that many each week. Then we discovered that if statistics are to be trusted, around one in three of those millions of new accounts likely belongs to someone with an elementary school education or less. Finally, we learned that the rally has minted an army of day trading housewives [5], security guards, and most recently, banana salesmen [6] who last Monday traded so much that they literally overwhelmed the Shanghai Exchange’s volume-tracking software.
But not everyone thinks it’s a veritable tulip mania, just ask HSBC’s head of China equity strategy Steven Sun who “wouldn’t say it’s a bubble,” or Citi who figures turnover in Hong Kong could double [7] from here boosting exchange operator HKEx’s bottom line by 40% in the process. So against this backdrop we wondered: are foreign investors as enthusiastic about the prospects for a continuation of the rally in Asia?
The answer, it turns out, is no. Here’s JPM:
How are investors positioned in China? Chinese equities continued to rally this week driven by Shanghai-Hong Kong Stock Connect program flows. The Shanghai-Hong Kong Stock Connect program, which allows investors in each market to trade shares on the other market, was launched on Nov 17th 2014, triggering a wave of inflows and speculation into the Chinese equity market initially and the Hong Kong equity market more recently. Figure 7 shows the cumulative Southbound and Northbound flow since Nov 17th. Both flows accelerated over the past week boosting the Chinese and the Hong Kong equity market. Another evidence of domestic support to Chinese equities comes from the continued opening of new trading accounts by mainland traders. The Chinese Securities Depository and Clearing Corporation reports the opening of new accounts in the stock market every week. Weekly account openings reached a new historical high with 3.3 million account openings last week alone. A record 14 million accounts opened so far this year. These account openings suggest that the speculative wave that the Shanghai-Hong Kong Stock Connect program triggered within China is currently accelerating.
What about overseas investors? The flows into Chinese equity ETFs have been rather negative in recent months suggesting that there is little appetite by overseas investors to chase the Chinese equity rally. How overweight in Chinese equities are these overseas investors? Looking at the share of China in equity ETFs divided by China’s share in MSCI AC World index (Figure 8), we find that overseas investors’ positioning in Chinese equities is rather neutral vs. its history.
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