By Tim McLaughlin and Ross Kerber
BOSTON, Sept 3 (Reuters) - Foreign investment funds are
moving at breakneck speed to retool their strategies in an
attempt to profit from Chinese stock markets whipsawed by panic,
paranoia and unprecedented government intervention.
The implosion in Chinese equity prices after a domestic,
debt-fuelled buying binge has triggered a range of responses
from foreign investors.
Those who remain bullish on China's long-run economic
prospects have switched more of their focus to the Hong Kong
market because valuations are lower, it is better regulated, and
less prone to the whims of officials in Beijing than the
mainland markets in Shanghai and Shenzhen.
Funds that see the recent declines in the yuan, Chinese
asset prices, and the nation's exports as a harbinger of much
more economic pain to come are responding with an array of
maneuvers. Those include betting against the currencies of Asian
trading partners, and shorting British banks HSBC Holdings Plc
HSBA.L and Standard Chartered Plc STAN.L , who both have big
exposure to China.
Some are even buying U.S. mortgage-backed bonds on the
expectation that rich Chinese will take money out of China and
pour it into U.S. real estate as a safe haven.
The investors who are betting against China or have given up
on it as an investment destination are in the minority, though.
Despite all the problems, the Chinese economy is still
expected to grow at around 7 percent this year, based on
official figures. That can't be sniffed at given the downturns
in many other major economies, such as Brazil, Russia and
Canada, and only modest growth in the U.S. and Europe.
That doesn't mean many believe it is safe to trade the
mainland markets, where the Chinese authorities have cracked
down on short selling, detained a journalist for spreading false
information and re-routed pension money into equities.
"The recent volatility I think has cooled the ardor of some
because they are realizing what an unusual instrument the
Shanghai Stock Exchange is," said William Kirby, a Harvard
Business School professor who studies China and is involved with
several funds that invest in the country, including as a
director of the $248 million China Fund Inc CHN.N .
"It appears this (Chinese) administration sees stock markets
as instruments of state policy," he said, adding that his
comments reflected only his personal views.
The safer alternative is seen as Hong Kong. The Hang Seng
Index .HSI , the mainstream index for the territory's market,
has dropped 24.3 percent over the past three months, compared to
a 36 percent slide for the Shanghai SE Composite Index .SSEC
and a 45 percent fall in the Shenzhen SE A Share Index .SZSA .
A NEW UNIVERSE
BlackRock Inc (NYSE:BLK) BLK.N , the world's largest asset manager, is
snapping up shares of Chinese companies listed on the Hong Kong
exchange after the recent declines, said Jeff Shen, head of
emerging markets for BlackRock. "We think it's a value play."
Bobby Bao, who runs the $1.3 billion China Region Fund
FHKCX.O for Boston-based Fidelity Investments, is still
hunting for value in the mainland markets, though only in
certain high-growth sectors. He is particularly interested in
investments that will capitalize on China's demand for personal
concierge services, ranging from make-up application at home to
car washing and in-house catering.
In recent months, he has bolstered his stake in Hangzhou
Hikvision Digital Technology Co Ltd 002415.SZ , the world's
largest maker of surveillance cameras that's listed on the
Shenzhen Stock Exchange. He cited the company's 40 percent
compound annual growth rate and the rapid expansion in the
installed base of security cameras.
In July, though, the company called off its planned $1
billion initial public offering on the Hong Kong exchange
because the territory's H-shares trade at much lower valuations
than mainland A-shares. The valuation gap is one of the reasons
foreigners have not been big investors in mainland-listed
companies, even before the recent plunge.
Indeed, overseas funds are estimated to hold only about 1
percent of the $7.8 trillion total valuation of all stocks
traded on mainland China's markets, according to Zhiwu Chen, a
finance professor at Yale University's school of management.
For those fund managers wanting to tap into Chinese consumer
demand, some e-commerce companies are still attractive.
"The Chinese love to buy things online and this sector has a
lot of upside," said Joe Quinlan, chief market strategist at
Bank of America (NYSE:BAC) wealth management unit U.S. Trust.
SHORT BETS
With Chinese authorities cracking down on what they call
"malicious" short sellers, foreign investors are steering clear
of any short strategies on mainland markets.
For those that want to take a bearish punt on China there
are other, less controversial avenues.
Tracy Chen, portfolio manager of the $935 million Legg Mason
Brandywine Alternative Credit fund LMANX.O , said China's
slowing economy prompted her last month to short the currencies
of a number of its Asian trading partners, expecting they will
decline as they take steps, such as cutting interest rates, to
stimulate their own economies.
Her fund has also made short bets on HSBC and Standard
Chartered plc STAN.L because of their big presence in the
Greater China region.
Andrew Lee, deputy head of the ultra-high net worth and
alternative investment office at UBS Wealth Management in New
York, said that the Australian dollar AUD= also is being
shorted by some hedge fund managers. The currency has been
falling, partly because of slack Chinese demand for Australian
metals and minerals.
The Canadian dollar CAD= is also being targeted by some
investors for similar reasons, said Eric Stein, co-director of
the global income group at Boston-based fund firm Eaton Vance.
One safe-haven strategy that hasn't performed as well as in
the past is buying U.S. Treasuries.
"They haven't done so well in the last month or so," Stein
said. Some investors speculate that the Chinese government has
been selling U.S. Treasuries and buying yuan to keep the
currency from selling off.
Chen, meanwhile, said she has been buying more
mortgage-backed bonds as she expects wealthy Chinese investors,
who have already been active in North American real estate
markets in recent years, to step up their purchases another
notch as a hedge against further trouble in China.
(Writing by Tim McLaughlin; Additional reporting by Svea Herbst
in Boston; Elizabeth Dilts, Lawrence Delevingne and Jessica
Toonkel in New York; and Simon Jessop in London.; Editing by
Carmel Crimmins and Martin Howell)