Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

You may not agree with Ivan Vatchkov, Singapore-based chief investment officer for Asia at the hedge fund Algebris Investments (UK) Ltd., but there are good reasons to pay attention to what he says.

The money manager told Bloomberg News that there may be opportunity in the equity markets of Shanghai and Shenzhen, where there are "lots of wonderful, wonderful businesses in China" that "occasionally are on sale because of the political, economic or market liquidity they have." Even if you disregard that fundamental strength, heed Beijing's hints that politicians wouldn't mind a controlled stock market rally.

The latest and perhaps biggest hint came last week. The China Financial Futures Exchange announced relaxed position limits, lower fees and reduced margin requirements. Those curbs had been introduced amid the market crash in August 2015 as the leveraged asset class was perceived by authorities as having been used to both inflate indexes and accelerate their descent. 

Go-Go Ahead?
CSI 300 futures volumes surged together with China's stock markets in 2014 and 2015. The end of curbs to the instruments may be seen as a sign of the return of happy times
Source: Bloomberg

The move followed a decision to nudge provincial pension funds into handing over management of their assets to the National Council for Social Security Fund. Unlike local government vehicles, the NCSSF is allowed to invest in a broad range of tradable securities. This change could inject an extra $30 billion into bonds and equities.

Also last week, China’s securities regulator announced new curbs on how much (and how often) public companies can issue new shares. That reduces the possibility of selloffs triggered by the additional supply of stock. 

There are scant statistics on the makeup of China's equity market, but the general understanding is that retail investors comprise two-thirds or more of it. These folks are particularly attentive to signals from Beijing. Whenever they see rules being relaxed, they tend to interpret that as a sign to get into that asset class -- and the opposite is also true.

Flirting With the Crowd
Retail investors drive China's markets, and they may be heeding Beijing's recent friendliness toward stocks
Source: Bloomberg

These hints from Beijing may help explain why the CSI 300 Index of stocks in Shanghai and Shenzhen is up 5.1 percent so far this year in local-currency terms. That's happening even as the Shenzhen and Shanghai connections with Hong Kong have channeled more funds from north to south than vice-versa. 

When Beijing winks, it's worth at least returning the glance -- Chinese investors, at least, are watching.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net