Investors are bailing out of China’s markets as fears grow over the slowing economy and Beijing discourages ideas that it might try to juice it back up

July 3, 2013, 11:52 a.m. ET

Investors Pull Back From China Assets

DANIEL INMAN

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Investors are bailing out of China’s markets as fears grow over the slowing economy and Beijing discourages ideas that it might try to juice it back up. Global fund managers have yanked money out of Chinese stocks for sixteen of the last 18 weeks, including a net $834 million during a five-day period ending June 5. That was the largest outflow since January 2008, when the financial crisis was getting underway, according to data provider EPFR. The gloomy mood is also spilling over into the currency market. Investors are raising their bets the yuan will fall, clashing with efforts by the central bank to keep it strong.The result is that as of Wednesday, the benchmark Shanghai Composite had slumped 12.1% this year. Investors have been piling out of emerging markets around the world in recent weeks in response to signs easy money supplied by the major central banks may be coming to an end. In Asia, the outflows from China have been particularly heavy because of the country’s mounting troubles.

In Hong Kong, where many foreign investors gain their exposure to Asia’s biggest economy, the Hang Seng China Enterprises index, which tracks Chinese companies, has fallen even faster than the Shanghai market, declining 22% this year.

Many investors blame China’s newly appointed leaders, who took office in March, as they have yet to tackle slowing growth. While officials have acted to relieve a shortage of cash in the interbank lending markets—a squeeze instigated by the People’s Bank of China in an attempt to address what it saw as out-of-control credit growth—the next major meeting of political leaders isn’t until the autumn. Investors remain in the dark over the direction of economic policy.

Meanwhile, Premier Li Keqiang has indicated that Beijing is reluctant to change its monetary and fiscal policy to counter a slowdown, while pledging to press ahead with changes that could make the country’s growth more sustainable.

“No one single person can make a policy and everyone else will follow,” said Arthur Kwong, head of Asian-Pacific equities at BNP Paribas Investment Partners in Hong Kong. Mr. Kwong, who manages $2 billion in assets, says that because of the uncertainty, Chinese assets represent a smaller share of his portolio than in the benchmark he follows.

Another worrying signal to analysts is that the People’s Bank of China continues to keep the yuan in a steady range, showing little intention to let it weaken sharply despite a slowing economy. The central bank sets a daily reference rate, and the currency is allowed to trade 1% above or below that point.

Investors are consistently selling, and the currency has stopped rising since reaching a record high last month. Derivatives traded in Hong Kong, where the currency moves freely, indicate the yuan will fall 2.8% over the next 12 months.

This “is a vote of no confidence to China’s growth outlook,” said Wee-Khoon Chong, senior interest-rate strategist at Société Génerale GLE.FR -2.03% in Hong Kong.

There are increasing signs that domestic investors are bailing out of the market, too. Substantial shareholders, such as senior management and individuals with stakes larger than 5%, are offloading shares they own. In May, selling by these investors of shares in China’s small and growth-enterprise stock indexes reached the highest level in percentage terms since the global financial crisis, according to research byUBS UBSN.VX -0.93% .

As a result of the selloff, stocks trading in Shanghai are valued in aggregate at just 10 times trailing earnings, far lower than in recent years. For some investors, that means they are poised to rebound.

“The market is pricing in Armageddon,” said Aaron Boesky, chief executive officer of Marco Polo Pure Asset Management in Hong Kong, which has $70 million under management. “Anyone in the market now would be foolish to sell. It has not been a fun ride, but to sell now would go against every tenet of investing.”

Still, a broad range of economic worries haunts other investors, from the sharp rise of shadow banking —investing and lending outside the formal channels — to oversupply in sectors from retailing to steel. The world’s largest banks have rushed to cut forecasts for growth in 2013. Last week, Goldman Sachs Group Inc. GS -0.32%estimated the economy will grow by 7.4% this year, down from an earlier prediction of 7.8%.

Recent industry reports point to a shrinking of the manufacturing sector, the heart of China’s economy, reducing expectations for second-quarter economic growth. The figures are due in the middle of July.

“I am quite positive in the medium term, if we are able to clear up and have more balanced growth in China, but before the end of this year I am not very positive,” said Frederic Lamotte, global head of markets and investment solutions at Credit Agricole Private Banking in Geneva, which managed assets worth 44.9 billion Swiss francs ($47.1 billion) as of the end of 2012.

Mr. Lamotte reduced his exposure to China around two months ago.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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