Trader’s Narrative

The Chinese government is actually taking measures to try and control this crazy market of theirs:

• Widen the trading band of the yuan against the dollar to 0.5%
• Up lending rate to 6.57% & deposit rate 3.06% (now just above inflation)
• Raise reserve requirements by half a percentage point by June 5th 2007
• Allow up to 50% of bank assets to be invested internationally

All of these measures are meant to reduce the liquidity sloshing around the Chinese economy (which is finding its way into the stock market). Another positive step they could take would be to allow short-selling but I’m not holding my breath. They already do not allow margin trading so all this mania has been created by fully paid up shares. Can you imagine what it would be like it gamblers, er, I mean investors were allowed to use margin?

To give you an idea of the bubble like action on the Chinese stock market, lets look at it from the point of view of long term moving averages. When the Nasdaq bubble topped on March 10th, 2000, it stood at 5048.62 while its simple 200 day moving average was at 3259.71. In other words, NASDAQ was appx. 54.88% above its long term moving average.

Right now, the Shanghai Composite is around 65% above its 200 day moving average and the Shenzhen Index is 86% above its long term moving average !!

Meanwhile, over in the US, the Dow Jones Industrial is a tame 10% above 200 day moving average and the S&P 500 is around 9% above its MA.

So how can you play this crazy Chinese market?

ok, lets try this again In my last attempt to list the Chinese securities available in the US markets I missed a few…

Thanks to a kind reader, I’ve been reminded of the existence of an exclusive way you can access the otherwise off limits Chinese A-shares. As you know, normally the A-shares are restricted to Chinese nationals but Morgan Stanley has negotiated a small quota of a few hundred million as a Qualified Foreign Institutional Investor and made it available on the NYSE.

An important distinction to note: Morgan Stanley’s China A-Share Fund (CAF) is not an ETF nor does it track an index. It is an actively managed portfolio structured as a closed end fund. And as such it can deviate quite a bit from the Shanghai and Shenzhen indices. It may also trade at premium/discount to its net asset value. And it does.

Right now CAF trades at a discount of 17.35% to its NAV. This is surprising when you consider the scorching performance of the Chinese markets and that this is the exclusive vehicle with which international investors can participate. Perhaps it has to do with the way the fund has lagged the indices:

As the chart shows, CAF has not kept up with the Chinese indices, lagging more than 50% behind the Shenzhen market. Also notice how it took the February 2007 correction much harder than the indices themselves. Unfortunately, “active management” isn’t contributing very much here.

On the plus side, if you’re thinking of shorting CAF, it could fall much faster than the Chinese indices.

Other closed end fund with Chinese exposure are:

• Taiwan Greater China Fund (TFC)
• The Greater China Fund Inc. (GCH)
• China Fund Inc. (CHN)
• JF China Region Fund Inc. (JFC)

and another ETF that I forgot to mention:

• SPDR S&P China ETF (GXC)