Weak hands to strong hands
As the US sells Chinese Equities, China sells US Bonds
In an unfortunately timed issue of the Financial Analysts Journal in q3 2021, it had been argued that the $337bn of wealth created by China ADRS (36% of all ADR wealth created since 1954) meant that asset allocators should be buying more on account of better risk adjusted returns. The delay in publication meant that by the time it was published investors were very much going the other way. We have discussed in the past how in August 2021 when Xi reminded international investors of the concept of ‘Common Prosperity’ he not only caused a crash in the China Education Sector, but he also undermined the whole magical thinking behind ADRs. The notion that a Chinese ADR was owned 100% by the international investor and simultaneously 100% by the Chinese investor always required some willing suspension of disbelief and this now disappeared. Stocks like Ali Baba, which alone had contributed more than half of that ‘wealth’, were sold on any rally, as was Tencent and even though their listings on the HK exchange helped find buyers on the other side, it was very much a case of weak hands going to strong hands. Knowing that there are distressed sellers, nobody is going to bid up. We see this as the primary cause of the bear markets across Hong Kong and China that began around then.
The first leg of the HK China sell-off was ADR related, the second leg ‘sanctions’ driven
However, we noted a second round of this selling over the summer, only this time it was related to concerns over US sanctions and affected all Chinese stocks, not just ADRs. We saw this as very much tied in with Geo-Politics, as the rhetoric about China went to new highs in the US and investors, understandably, feared being left stranded again, like they were with the ADRs, and for some more recently, Russian assets. We saw this as being at least partly behind the ‘everything is rotten in China’ assertions to be found all over the wire services and in the US media. It was a narrative that suited both Washington at a time when China was wooing the BRICS+ crowd, and those investors who had sold; giving them a fundamental reason to justify their asset allocation. Our view was, and remains, that the fundamentals remain much as they were in China; the property sector has been in trouble since the Common Prosperity shock in August 2021, not least because it was a bubble propped up by overseas corporate bond investors, while the data on exports and youth unemployment is disingenuous at best. Other problems such as demography and local government debt are neither new nor as serious as presented and come under the category of ‘Why am I being told this? And why now?
Just as the west is selling Chinese Equities, so China is selling western bonds, Especially Treasuries
Now, however, we see an equal and opposite effect starting to happen, this time in the US Bond markets. Just as Western ‘weak hands’ have been selling Chinese Equities, so Chinese ‘weak hands’ have been selling US Treasuries. Partly, this is for the same reason everyone else has been, for buy and hold investors, i.e not traders, US long bonds have not given a positive return since 2015, but it is also de-risking politically. The China government publication Global Times, which reported the selling of Chinese holdings for the fourth consecutive month such that they now stand at a 14 year low of $821bn, couldn’t resist a swipe at the US economy as a ‘reason’, but we don’t think this is just a political ‘spat’. Rather, we see this as part of a process of de-dollarisation and a recognition that buying Treasuries simply hands the ultimate investment decision to the US. China, and we suspect most of BRICS+, is now much more focussed on Belt and Road type investments in real assets, with any US $ liquidity needs satisfied by the very short end of the curve.
Bottom line - East is East and West is West ……
Western Equities need western bonds to stabilise and that in turn requires fixed income money to move down the curve, currently being crowded out by cash returns. It won’t take much of a signal from the Fed to start the process. Meanwhile, Hong Kong and China equities need western selling to stop and allow fundamentals to reassert - perhaps with some signal of encouragement from the government We think the time is soon approaching when both of these will happen and strong hands move to take over from weak hands and ‘cross-polar’ holdings unwind. ‘The rest’ will no longer allow ‘the west’ to recycle its savings in the old way.
As usual, none of the above should be taken as investment advice, it is for information and hopefully entertainment purposes only. Please speak to your investment advisor before making any decisions.