China opens up further and begins another round of QE

26 November 2014

We are seeing confirmation from various sources and an important change in institutional investors’ choices in China. Returning from a key financial conference on Asia, Kairos managers report the feeling that the main themes in managers’ portfolios remain those connected to consumption, the Internet, the environment, training and healthcare, but interest in the railway sector has grown as well. As if the many projects to be built at home were not enough, China’s major companies have started bidding in international tenders and meeting with success. Last month, for instance, a Chinese company was awarded the contract to build Boston’s subway trains. All this activity goes hand in hand with the recent meeting between President Xi Jinping and Obama at the APEC conference in Beijing: the talks on the table included the possibility of increasing trade between the countries. The Chinese would like to expand their maneuvering room in the US, especially in infrastructure, while the Americans are attracted by the immensity of China’s potential service market.

Local managers continue to carefully monitor conditions on the real estate market, which indicates over-capacity in certain cities. However, we are confident that the government’s stimulus measures will suffice to prevent a real estate crash, also considering the low level of household debt. In this respect, the recent interest rate cuts approved by the central bank mark a significant shift in the authorities’ stance, as they had previously opted for more limited, targeted measures. The rate cut will indeed support the real economy, particularly those sectors most vulnerable to interest rates, with real estate at the top of the list.

Another important event was the launch of mutual market access between the Shanghai and Hong Kong stock exchanges. Since 17 November, Chinese investors can invest on the Hong Kong market and all foreign investors holding an account with a Hong Kong broker can buy securities listed on the Shanghai market. In this way, investment opportunities still abound, especially in securities that are listed on both markets but traded at discounted multiples in Shanghai and in companies and sectors present on the domestic market only. The market reacted positively to the launch, showing performance well into the double digits since the start of the year.