A durable rally?

Kriya Capital’s Han Ching Choong

Han Ching Choong is co-founder of Kriya Capital, a fund that specialises in China-themed investing. Between August 2012 and last December, her portfolio was up more than 100% net of fees. Below, she discusses the recent surge in trading volumes in Hong Kong and whether a bubble is forming in China stocks.

Why is there such buying frenzy?

The Chinese government wants the stock market to play a more meaningful role as a financing channel and part of this involves getting more participants into the market. Thus we’ve seen unusually encouraging official propaganda along the lines of “come on in, the water is warm”, and this has fuelled the turnover-driven increase in the A-share market that started in July.

Initially the focus was on local stocks but with the Shanghai-Hong Kong Stock Connect becoming more established, and with retail investors looking for short-term momentum, there’s been a spillover into Hong Kong. An announcement last week that gave more mainland institutional investors permission to buy Hong Kong-listed stocks looks to have been the trigger for the surge in trading volumes. But it should be said that the increase in the southbound investment flow – from the mainland into Hong Kong – is not the whole story. It was less than 5% of Hong Kong’s turnover. In fact, volumes only reached record levels because Hongkongers and international investors saw that the southbound investment quota was set to be filled for the first time. They sensed a new trend and began buying too. That drove the frenzy.

Has your portfolio benefited?

My fund looks for long and short opportunities that are correlated with big shifts in the investment landscape in China. Southbound investment in the Hong Kong stock market has not been a central theme but has nevertheless benefited some of our long positions in H-shares [Chinese stocks listed in Hong Kong], as well as Hong Kong companies with strong China profiles. We continue to like the landscape-shifting themes we are invested in – such as outbound China (tourists travelling abroad) and urbanisation.

The buying is mainly in H-Shares?

Yes, but in my view the point of the Stock Connect is not just to let mainlanders buy H-shares. The Southbound channel offers a means of diversification for A-share investors too. For example, if investors in Shanghai were previously bullish on urban rail projects they could only invest in either the rolling stock manufacturers or a state-owned subway operator at a valuation of around 40 times forecast 2015 earnings. But now they can also invest in Hong Kong’s MTR [the operator of Hong Kong’s mass transit railway] at 20 times, for negligible difference in transaction cost or liquidity risk.

Are we nearing bubble territory?

Bubbles are usually underpinned by excessive leverage and happen after a trend becomes so entrenched that people believe that extrapolating current stock gains is the only sensible view. Given that the A-share market is “freshly” (in terms of time) emerging from a four-year-or-so bear market, one might conclude that this cannot be the case (yet). But then this is China and it doesn’t take long for players to learn new tricks, especially by leveraging up returns with margin trading, and through securities-collateralised lending.

I’d also suggest that the current market environment is not characterised by firm conviction or much confidence. When the CSRC intervened in January (calling for brokers to play by the rules) it sent the market down 7% and triggered much more stop-loss selling than official exposures would suggest. So paradoxically a proper bubble may not get the chance to develop this time.

Put another way, a market based on shaky ground could collapse by as much as it rises, and quickly. Bear in mind that regulatory bias in China has been conservative, especially since 2011. New measures seem calculated to potentially stem any bubble – such as allowing more domestic IPOs, and encouraging funds to flow from the A-share market into Hong Kong.

I believe the regulators’ aim is to have a functional capital market that supports an evolving and thriving private sector.

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