2017年8月22日星期二
 
專家論市
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group mwh@thehenleygroup.com.hk
"Opinions on the economic outlook for China differ wildly."

China equities trumpeted for second glance
21/10/2013


Opinions on the economic outlook for China differ wildly.

In fact few topics arouse such passion among economists. Some argue that total collapse is inevitable and just a question of time. Others suggest China's rapid development is a perfect role model for everyone else.

In real terms the country has already overtaken the United States as the world's largest economy, they say, and that it will pull the whole world out of trouble.

Clearly, there are arguments that can be made for both sides. For example, on the one hand, the existence of some ghost cities as well as bad loans made to local government entities are a reality.

But it should also be noted that the vast majority of mainland cities are bustling with life. Many of them lag space amid high rents, while the much- hated Chinese banks actually have among the highest reserve requirement ratios in the world.

Unlike their casino-type Western counterparts, they do not engage in high-risk proprietary or derivatives trading.

Moreover, it is also true that China has already become the world's largest manufacturer and energy and motor vehicle consumer as well as the biggest trading nation.

Whichever side of the fence one stands on, no one can deny China has become a major economic force. Also, few observers doubt its currency, the yuan, is likely to play an increasingly important role as mainland policymakers seek to promote its use in the global arena.

Whether one likes it or not, it should also be clear
the yuan has arguably become part of the base currency for Hong Kong residents, given the increasing integration of the SAR and mainland economies.

About 70 percent of our food is imported from the mainland, which means that consumer prices locally will rise, hiking inflation, whenever the yuan strengthens - as it has for the past several years - against the US dollar.

Hence, it would appear prudent for local investors to gain or hold at least some exposure to yuan assets to at least hedge currency risks.

Given rising global inflation expectations, however, just holding yuan cash deposits may not be the best way to gain exposure to the currency. So should one should think of buying property and stocks?

It is interesting to note that, since late 2007, property prices have roughly doubled both in Hong Kong and the mainland.

In cities such as Beijing, prices have almost quadrupled while mainland equity prices have lost about two-thirds of their value in the same period.

In other words, property prices relative to equities are now six times more expensive - Beijing property is 12 times more costly.

In other words, equities have dropped more the 80 percent relative to property prices.

In fact, Hong Kong and mainland property prices, as measured in relation to average household income (and also as measured per square foot in the case of Hong Kong), have become the most expensive in the world. Their equities, meanwhile are now among the world's cheapest.

So, relative to property, it appears the equity market has become more attractive again from a value perspective.

For investors, especially those focused only on Hong Kong or mainland direct property exposure, it would seem wise to consider diversifying some holdings into the equity market at this point.

Such equity exposure may well include listed property equities and real estate investment trusts as well.

Many of them are trading at attractive prices below their book value.

The recently imposed higher stamp duties in Hong Kong, and increased property purchase restrictions in the mainland, may eventually lead property investors to reconsider their preference for directly owned property assets, and rotate to REITs or listed mixed developers/REIT equities - noting that even the leading local developers often also have substantial physical property ownership both in Hong Kong and the mainland, while their current equity prices are not expensive.

Accordingly, mainland equities now offer reasonable value at present compared with property prices and are essentially inflation-protected exposure to the yuan.

And there is possible further appreciation as the currency liberalizes.

Some yuan exposure may be especially important for local investors, if only from a currency hedging point of view, at a time when the reliability of the United States and its currency is being increasingly questioned amid rising debts.

A default on US treasuries has been averted this time.

But with another increase in the debt ceiling just around the corner, it should be noted that the actual problem is not the ceiling.

Rather, it is the size of the debt itself - particularly in a rising interest rate environment where debt servicing costs are likely to surge.
 


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