So, as traders we can deploy capital to any market or economy, which in turn causes capital flows and subsequently forex movements. This is in theory only achievable through open market economies.
Over the last twelve months there would have been many emerging and frontier markets’ governments and central banks who would have liked to change to a more closed structure given the massive levels of outflows, especially those countries that run sizeable trade and current account deficits.
China’s capital control
China has closed capital accounts and also limits the movement of capital in and out of the country at any one time to $50,000. There are sometimes exceptions when the State Administration of Foreign Exchange (SAFE) permits more, while others find other more ‘creative’ ways to move money around; some of which has made its way into China’s shadow banks and has helped fuel the surge in credit over years.
Traders’ current views
Having just spent a week in China and Hong Kong myself and speaking to a number of traders, I found the results very interesting. Firstly, they saw significantly greater opportunities outside of China, although like many western strategists, views on the level of Chinese growth and the risks faced over the next couple of years varied greatly. However, on the whole the view that the authorities will engineer GDP to ‘about 7.5%’ seemed to be the most prominent call.
The fact that the PBOC has changed tact and allowed defaults to occur has been influential. New information that China’s top four banks sold $450 billion in unguaranteed financial products suggests sentiment towards these heavily marketed, seemingly once unlosable products could change.
This matters because wealth management products are still the most sought after asset class in the local market. However, Chinese investors are now learning to be much more selective in their approach.
Alibaba’s E-payment arm, Alipay, recently highlighted the demand, launching a one-year wealth management product (WMP) with a compelling rate of 7%. Alibaba is a very well respected household name in China and a 7% return is always going to well bid.
Outside of WMPs, options are fairly limited. Most traders interviewed were lukewarm on domestic and Hong Kong stocks, predominately as some felt there was a lack of belief that companies were run in a way that held the average shareholder at heart, especially given the levels of state ownership in China.
There certainly wasn’t a strong feeling that there is a level playing field at all times. The very high level of retail participation in a day’s turnover also kept many away, and it’s for these reasons that although the valuations are the ‘cheapest’ globally (on price-to-earnings and book ratios), most saw this a ‘play trap’ than ‘value play’.
The bond market is a no-go for retail traders, property has become less compelling given the falling rates of price appreciation, with price-to-rent ratios also around 40 times in the key eight cities, and above many of the levels of the known property crashes over the last 50 years. There are opportunities in some of the Shanghai-listed futures markets and there was good interest in shorting copper, but liquidity is fairly poor in these exchanges.
When talking to traders about some of my own trade ideas and strategies, it was interesting to hear the strong understanding of offshore macro developments and the strategies currently being deployed. There was a strong bias to be long the USD, notably after the recent FOMC meeting, those trading global indices preferred to express their view through European markets as opposed to the Asian bourses or the big three US benchmarks. There were fairly mixed views on gold, with those who were bearish gold marrying this up with a bullish view on the USD.
Japan is an area where traders still largely expect further easing from the BoJ, in-line with market consensus, most believe additional easing will occur around June or July. This stops them from being significantly overweight the JPY, although they still felt it was the best G10 currency to be leveraged to in times of risk-off sentiment. By and large the feeling was that more would have to be done; while some traders were fairly bearish on China, some also saw Japan’s significant easing policy as the number macro concern over the coming years.
Looking ahead at Chinese traders
One theme that plays into strategists’ mind-sets is how the financial world will look like in two-years. How will markets be positioned and what is the trade if the Federal Reserve, RBA, RBNZ, BoE and Scandinavian central banks tighten monetary policy, while the BoJ and ECB continue to take a much easier stance?
Markets always try and look forward and it was positive to speak to traders thinking outside of the box, matching strategies with that of the stance from the underlying central bank.
I was thoroughly impressed by what I heard, both from a strategic point of view and also the logic shown in structuring ideas. With limited opportunities domestically and better opportunities (from both a long and short perspective) outside of the Tiger economy, this is a concept that should get greater attention. Throw in the recently announced urbanisation plans, an ever growing middle class and continued thirst to achieve higher returns, and it seems what the Chinese retail trader does over the coming years will be very interesting, especially if the process of liberalisation is stepped up.