Greetings from Shenzhen, China!
I just got here this morning, after stops in Hong Kong, Macau, and Taiwan.
And as you might guess, traveling like this can get exhausting. But while I was in Hong Kong, I got a much needed shot of adrenaline.
That’s because the China Securities Regulatory Commission (CSRC) announced a sweeping change that will permit Chinese institutional investors — banks, insurance companies, and mutual funds — to invest billions in the Hong Kong stock market.
In other words, the timing of my trip couldn’t have been better! Everything tells me money is going to pour into Hong Kong equities, sending some of them to the moon. And investors who take advantage of this monumental opportunity stand to reap amazing profits. Let me explain …
Following the Yellow
Brick Road to Hong Kong
Given China’s breakneck economic growth, it’s easy to forget that the country is still a command economy controlled by the Chinese Communist Party. But it is … and the fact that the CSRC was able to prevent Chinese financial institutions from investing in foreign stocks is a good reminder.
See, the Chinese government clearly wanted to keep money at home, so they only allowed their financial institutions to invest in the Shanghai and Shenzhen stock markets.
But that policy was one of the reasons stock prices got pushed to dangerously high levels on the Chinese exchanges. Heck, P/E ratios of 50, 60, and 70 are very common for stocks trading on the Shanghai and Shenzhen markets.
By permitting Chinese institutions, called Qualified Domestic Institutional Investors (QDIIs), to invest in foreign markets, the CSRC hopes to lighten some of the immediate pressure from mainland China’s stocks.
That’s a good thing. When governments try to artificially pump up their share prices in the absence of real demand, THAT’s what worries the heck out of me. But the Chinese are doing precisely the opposite: They’re trying to tame speculative fervor, and for investors like you and me, that’s a reassuring sign.
What’s even more reassuring is that, despite these moves, the Chinese stock market is still moving sharply higher, more evidence of the strong, underlying demand.
Plus, in the short term, the most important impact of these new rules is that QDIIs are going to pour billions of dollars into the Hong Kong stock market. For now, QDIIs will be able to invest about $7 billion, but I expect the Chinese government will expand this quota in the future.
This Could Be Rocket Fuel
For Some Hong Kong Stocks
Yesterday, Martin made a strong case for investing in Hong Kong in his own article, “The NEXT Foreign Market to Blast Off.” And let me tell you, this latest news is like throwing gasoline on a fire …
On the exact day I arrived in Hong Kong, I saw the effects with my own eyes … the Hang Seng Index surged a whopping 511 points, or 2.5%, in one trading session!
Across the board, stocks soared: China Mobile rose 3.9% … China Life gained 5.9% … Ping An Insurance climbed 7.3% … Hong Kong Stock Exchanges and Clearing tacked on 10.8% … Maanshan Iron was up 13.8% … and Jiangxi Copper skyrocketed 18.9%.
And those gains could be just the beginning. Here’s why …
Many companies that are incorporated in China are listed on both the mainland China exchange and the Hong Kong Stock Exchange (called “H” shares). Roughly one-half of the Hong Kong market’s capitalization is composed of mainland China companies.
And I know it might sound crazy, but some stocks cost twice as much in Shanghai as they do in Hong Kong. Here are some of the numbers I saw in the May 15 edition of The Standard newspaper (the day after the new policy took effect):
|
Mainland Stock (Hong Kong ticker) |
H-share |
A-share |
Discount |
|
Sinopec Yizheng Chemical (1033.HK) |
4.91 |
15.34 |
68% |
|
Nanjing Panda Electronic (0553.HK) |
4.68 |
13.71 |
66% |
|
Shandong Xinhua Pharm (0719.HK) |
3.94 |
10.93 |
64% |
|
Belren Printing Machinery (0187.HK) |
4.27 |
11.12 |
62% |
|
Beijing North Star (0588.HK) |
4.66 |
11.25 |
59% |
|
Sinopec Shanghai Petrochemical (0338.HK) |
5.94 |
13.94 |
57% |
|
Chongquing Iron & Steel (1053.HK) |
3.86 |
8.15 |
53% |
|
Huadian Power Intl (1071.HK) |
4.47 |
8.99 |
50% |
|
Jiangxi Copper (0358.HK) |
13.44 |
24.53 |
45% |
|
Guangzhou Pharmaceutical (0874.HK) |
7.98 |
14.51 |
45% |
Talk about pricing discrepancies! So over time, here’s what I expect to happen — money is going to be diverted from high-valuation mainland-China-listed stocks to Hong Kong-listed stocks, many of which are trading at half the price of their Chinese counterparts.
In my book, there are at least three ways to make a bundle from this important policy change:
The “H” shares of mainland-China-listed companies: — As the table above shows, there are huge gaps between Hong Kong-listed stocks and their mainland-listed counterparts. Hey, if you were a Beijing money manager, which issue of Sinopec Chemical would you buy?
Chinese companies that were never listed in China: — Up until now, mainland China institutions were completely frozen out of some of China’s fastest-growing companies. Companies like China Mobile, China Telecom, China Shenhua Energy Company, PetroChina, and CNOOC simply are not listed on the Shanghai or Shenzhen stock exchanges. For the first time, QDII investors can invest in them, and you can bet your boots that’s just what they’ll do.
Hong Kong-focused funds: — You should also take a long, hard look at the iShares MSCI Hong Kong Index (EWH). That’s because this broad-based exchange-traded fund can give you a stake in much of the sweetest part of the billion-dollar Hong Kong boom.
Bottom line: If you haven’t made Asia an important part of your investment strategy, this is an opportunity to put some of your portfolio into the fastest-growing region in the world.
Stay tuned for more updates from my trip!
Best wishes,
Tony
P.S. I think Martin’s new blockbuster report — “The ETF Advantage for Growing Wealthy Globally” — is IDEAL for this situation. It’s free. And it comes with five other great reports, also free. Click here for all the details.
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