an exposure to the chinese market - thenextview.com · • ichimoku kinko hyo • addressing...

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Howie Lee

Phillip Futures Pte Ltd

Investment Department

July 2014

China A50: An Exposure to The Chinese Market



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YOU JUST CAN’T IGNORE CHINA

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Singapore and China



Singapore and China

US

Japan

ChinaChina

Malaysia

US

Japan

Malaysia

China

US



Objective

• China: Worth a Second Look

• The China growth story

• Rapid milestones in recent history

• Achievements unlocked – and more to follow

• Analysing the A50 Index

• Access to ‘A’ Share

• Dynamic constituents

• Correlation with Shanghai Composite

• High volatility for yield capture

• Deep liquidity, extended trading hours



Objective

• Using Technical Analysis to trade A50

• Golden/Death Cross

• Bollinger Bands

• MACD

• Ichimoku Kinko Hyo

• Addressing burning questions on China

• Is there a debt bubble?

• Is there a property bubble?

• Will poor PMI numbers affect the A50?

• Why does China hold so much US bonds



THE CHINA GROWTH STORY

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The China Growth Story

Shanghai




1980

2011

Shenzhen




Shenzhen



Emerging Markets Lead Growth…



…and China tops the EM pack

China Growth Story: low-cost, abundant labour, easy credit, massive investment



China To Overtake US Economy




Assume: US growth picks up every year by 10bp and stabilise at 2.5%

China growth slows down every year by 10by and stabilise at 6%

Est 2028




GDP is measured in USD.

China economy is measured in RMB then converted into USD.

If we include RMB 2.8% annual appreciation, China may takeover US in…

Est 2022



ROOM FOR FURTHER GROWTH

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A Walk Down Memory Lane…

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- 1978, Deng Xiaoping enacted economic reforms- Farmers can cultivate family plots rather than communal farms- Rural-urban migration raised overall productivity in China- Cheap labour costs made goods inexpensive, net exports drove economy

1978 1990

- The Chinese have gotten wealthier after a decade but the middle class is nowhere near established- With their newfound wealth, they chose to save most of it, resulting in high savings rate- High savings rate fuelled rising investments- Investment has become the main bulk of growth for China since then- Government expenditure remains constant at about 14% of GDP

2004

- In 2004, investment as a share of GDP hit 43%- National savings rate touched a high of 50% of GDP- At the annual Central Economic Work Conference, top leaders agreed to fundamentally alter the country’s growth strategy to rely more on domestic consumption

GDP = C + I + G + NX



GDP per Capita 93rd In The World

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- Despite the double-digit growth, income per capita in China is still very low- No reason to suggest why it won’t grow further in the next decades

- Pulling away from India; next target – South Korea



Still room for productivity improvement

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- There have been recent concerns over a potentially shrinking workforce in China,

as the one-child policy comes of age- Productivity is still strong; China has one of the highest productivity growth rates

- “Peak toil” less relevant to China then to a developed country like Japan

Despite high productivity growth, still much room for improvement



China’s Current Transitions

• Supporting alternative energy policies

• Xi Jinping has indicated he is keen

to preserve the environment at the

price of short-term grow

• Clamping on corruption• Bo Xilai case a testament to the

central government’s resolv

• Raising confidence in domestic goods

• Companies that produce high

quality exports for Apple are not

producing much for own market

• Consumers still tainted by the 2008

contaminated milk scandal

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• “Go West” initiative• Economic centers – Shanghai, Beijing,

Hangzhou, Shandong, Shenzhen – are

all located along the East Coast

• Plans to develop central, West China

• Goldman Sachs recently bought stake

in Mongolian bank

• Clamping on corruption• Bo Xilai case a testament to the central

government’s resolve

• Allowing bond defaults• Is actually good news, shows that

problems will not be swept under rug

• Clamp down on errant lenders,

unproductive companies

“An efficient economy gets the right goods, sold at the right prices, to the right people”



RMB Liberalization – A Sign of Things to Come

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As China strives to be a economic powerhouse, it needs its currency for use in international market to settle trade transactions, without exposing domestic capital account

Offshore Renminbi

Dim SumBonds

Bonds issued outside of China, but denominated in RMB. RMB-bonds are popular as foreign companies sought to capitalise on RMB appreciation.



Many Firsts for China… And More To Follow

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An Interesting Investment Choice

• Few countries come close to China in matching its historic growth rate

• Going forward, we see much scope for improvements in consumption levels

• Recent transitions have set off a new wave of developments, interesting to see how it unfolds in near future

• Not possible to ignore China; topping many tables and more to follow

• How do we expose ourselves to China?

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FTSE China A50 Index

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sideways

upup

false dawn

down

down

down



TRADING SGX FTSE

CHINA A50 INDEX FUTURES

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Analysis of the A50 Index



SGX FTSE China A50 Index Futures

• Exposure to ‘A’ shares

• Dynamic index constituents

• Correlation to Shanghai Composite

• Strong volatility for yield capture

• Steady liquidity, extended trading hours

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Exposure to ‘A’ Shares

• Benchmark index for investors to access China domestic market through ‘A’ shares• ‘A’ shares – shares in mainland China-based

companies on Shanghai/Shenzen Stock Exchange, quoted in RMB

• ‘B’ shares – quoted in foreign currency, available to foreign investors

• ‘H’ shares – China-incoporated companies traded on HK Stock Exchange

• Red Chip – stocks of China companies incorporated outside China, trade in HK

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Exposure to ‘A’ Shares

• 50 largest ‘A’ share companies

• Market-cap weighted

• FTSE A50 is part of FTSE China Series

• China A50

• China Large Cap A200

• China Mid Cap A400

• China Combined Large/Mid Cap A600

• China A Small Cap

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Index Constituents Represent Economy

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-Largest composition: financial companies

-Basic materials and utilities: phasing out

-New entry: health care

Reflects “New Economy” of China – From Labour Intensive to Capital Extensive









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Correlation With Other Indices

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Notice how closely blue and red line sticks to one another




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-China A50 has a huge correlation with Shanghai Composite – 96%-Hang Seng has the worse correlation with Shanghai Composite

-Hang Seng are ‘H’ shares – influenced by both domestic and foreign sectors

-SH Comp mostly influenced by domestic factors-SH Comp and A50 are exclusively close









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CHINA STOCKS –ARE THEY REALLY LIFELESS?

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30 Day Rolling Volatility

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Volatility: measured by standard deviation of returnsAssumes normal distribution as N is large

Volatility peaked in 2007-2008

Volatility subsiding in 2014 –

but is it just a Chinese phenomenon?



A50 has higher volatility than S&P 500

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But in reality, A50 has larger volatility than global benchmark S&P 500

A50 starts and ends the year at about the same, but daily fluctuations are huge




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Other than a few instances in 2008 and 2011 (financial crisis, Euro crisis),A50 displays more volatility than S&P 500 across 10 years.

To say A50 is lifeless is probably not accurate.



Low volatility in 2014 affects global stocks

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In 2014, it appears Chinese stocks volatility sinking lower.However, it is a global phenomenon: most stocks are sideway trading.

In fact, China stocks still higher volatility than S&P 500.



Importance of volatility

• Traders thrive on two cores:

• Volume

• Volatility

• A50: higher volatility than widely-traded S&P 500

• It is not as lifeless as most people make it out to be

• But does it have volume?

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DEEP LIQUIDITY



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Quick Facts:

�Only China A-share futures available to

international participants

�Most liquid offshore listed A share product

�Extended trading of 16.5 hours

�Diversified customer base: banks, hedge

funds, asset managers, CTAs, proprietary

trading groups, retail

�Most cost efficient offshore listed A share

product

�CFTC approved for U.S investors

OTHER FEATURES



Analysis of the A50

• Exposure to 50 largest ‘A’ shares, as well as to the “New Economy”

• Strong correlation to Shanghai Composite

• Higher volatility than S&P 500

• Rising trading volume

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USING TECHNICAL ANALYSISON A50 FUTURES

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Technical Analysis on A50 Futures

• Golden/Death Cross (Mov. Avg.)

• Bollinger Bands

• MACD


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Technical Analysis: Golden/Death Cross

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China A50 in July

10 min Chart

10 Ticks

18 Ticks




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China A50 in June

10 min Chart

18 Ticks

40 Ticks

40 Ticks




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China A50 in May

10 min Chart

20 Ticks

33 Ticks

26 Ticks





• Bollinger Bands

• MACD


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Technical Analysis: Bollinger Bands

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China A50 in June/July

60 min Chart

A50 Hourly Chart – graph tends to trend along

Bollinger Band, little tendency to rebound





• Bollinger Bands

• MACD


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Technical Analysis: MACD Positive

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China A50 in July

60 min Chart



Technical Analysis: MACD Negative

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China A50 in July

60 min Chart





• Bollinger Bands

• MACD


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Technical Analysis: Ichimoku Kinko Hyo

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China A50 in July

60 min Chart



Technical Analysis: Ichimoku Kinko Hyo

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China A50 in July60 min Chart



FAQS ABOUT CHINA

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Question 1

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• Question: is there a debt bubble in Chinese cities?

• There is debt but it may not be an immediate cause for concern.

• The Chinese have high savings rate

• Most of this debt is from the local govt to the local Chinese

• Not the same as, say, debt owed by Indonesia to US



Question 2

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Question: is there a property bubble?

• Yes, there is a property bubble

• But government is in control. Beijing is an example of tight governance

• Govt balances pleasing new homeowners (want cheap housing) and existing homeowners (want prices to go up)

• Prices likely to stay at this level in the short-middle term, unlikely to have bubble burst



Question 3

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Question: PMI is bad, does it reflect A50?

• HSBC PMI is indeed bad

• But HSBC PMI measures small and medium owned enterprises

• A50 – 50 largest ‘A’ share companies. Probably state-owned.

• Official PMI a better barometer



Question 4

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Question: Is China’s large T-Bills holding a source of concern for A50 investors?

• China exports to US, meaning US buys RMB using USD

• The dollar itself does not earn interest, so China buys liquid T-bills to generate income

• There is few other options, so it isn’t really China deliberately lending to US

• Few recognise US budget deficit is shrinking very quickly – debt holdings in PBoC’s vault isn’t a problem



CONCLUSION

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Conclusion

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• China’s impressive growth story

• How far it has come in the past 30 years

• May overtake US as early as 2022

• Stats about A50


• Exposure to “New China”


• Volatility higher than S&P 500

• Increasing trading volume



Conclusion

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• Technical analysis

• Golden/Death cross: fairly good indicator

• Bollinger bands: tendency to stick to band

• MACD: more useful for bull than bear

• Ichimoku: little conclusion (3/5 spot-on)

• FAQs: why A50 unlikely to bust near-term



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THE END

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