VE Day drives rally in HK equities; mainland next up

PUBLISHED : Monday, 31 October, 2011, 12:00am
UPDATED : Monday, 31 October, 2011, 12:00am


A breakthrough! An agreement was struck last week by euro-zone leaders to dramatically cut Greek debt - largely due to a long overdue plan to force investors to take a 50 per cent loss on Greek government bonds. The deal promised to seal Greece's debt crisis. Equity markets soared globally, with the Hang Seng Index up 11 per cent for the week.

Hopefully, Hong Kong investors can put aside their euro-zone anxieties and bring a less panicked focus to their main market, China, where they are seeing many reasons for optimism.

Steven Sun, head of China equity strategy for HSBC, notes that investors sold down China equities 30 per cent in the third quarter, partly on the view that mainland growth is built on credit, not innovation, and is vulnerable.

'Investors priced in a 70 per cent chance of a hard landing in China,' says Sun. 'If investors thought China could save the world in 2008, now they think it might sink the world.'

However, he believes authorities have the tools to combat any downturn, and indeed, they are now deploying what he calls the four selective easings, or the 'four Ss': small and medium-sized enterprises' financing, special projects, social housing and structural tax reduction.

SMEs need credit, and Sun says Premier Wen Jiabao's visit to Wenzhou, Zhejiang - the centre of China's shadow banking system - on October 3 and 4, indicates help is on the way; special projects is mostly about channelling money back into the rail sector; social housing refers to a government plan to build millions of low-cost homes; and structural tax reduction is about overhauling the tax code to make it more business friendly.

What does that mean for Hong Kong-listed China shares? The impact was seen best in the explosive upturn in the price of rail stocks last week, led by CSR Corp (1766), China Railway Group (390), Zhuzhou CSR Times Electric (3898), China Automation (569) and China Railway Construction (1186). (See Ticker Board)

An initiative to get the government's social housing plan back on track is positive for cement makers, with Anhui Conch Cement (914) rallying last week.

The SME scheme bodes well for the credit-challenged property sector, as evinced by Evergrande Real Estate's (3333) 40 per cent gain last week, and a 33.6 per cent rise for Agile Property (3383).

Somewhat incidentally, electric car specialist BYD also staged a rebound last week because of positive publicity generated by the opening of its North American headquarters in Los Angeles.

The prevailing mood, then, is that euro-zone debt is an addressable problem and that China growth is still an investment story you can believe in. Positive US economic data released last week also encouraged investors.

But there is always something new to worry about, such as a congressional review of the US debt 'situation' (not yet a 'crisis') at the end of next month. A failure there to come up with a debt reduction plan could once again send investors bolting for the exits.