Analysis: "Caveat emptor" as foreigners rush to ride China rebound

Sun Nov 25, 2012 8:33pm EST
 
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By Vikram Subhedar

HONG KONG (Reuters) - Foreign investors have started rebuilding their China equity portfolios, tempted by low valuations after two years of market underperformance and signs economic growth may be stabilizing.

They have pumped nearly $4 billion into Chinese equity funds in the past two months alone, trying to get in early on what they hope will be a sustained rally.

But sentiment looks to be running ahead of fundamentals. There are clear risk signals for the Chinese market -- including sluggish earnings, rising corporate debt and retail investors looking for other opportunities -- even if the broader economy gathers strength.

"Valuations are attractive and fears of a major slowdown in China seem to be waning, while China still promises growth faster than the rest of the world," says Paul Gillis, professor at Peking University's Guanghua School of Management.

"But most of the problems affecting Chinese stocks -- accounting fraud, the variable interest entity and regulatory stand-offs between the U.S. and China -- have not gone away and still need to be solved."

Illustrating that growth does not translate into equity gains, the MSCI China stock index has fallen more than 40 percent since its launch in 1992. Over the same period, China's nominal GDP has increased by 15 times.

REBALANCING

The shift in foreign investor attitudes is clear.   Continued...

 
Investors look at computer screens showing stock information at a brokerage house in Shanghai in this June 8, 2012 file photo. Foreign investors have started rebuilding their China equity portfolios, tempted by low valuations after two years of market underperformance and signs economic growth may be stabilizing. They have pumped nearly $4 billion (2 billion pounds) into Chinese equity funds in the past two months alone, trying to get in early on what they hope will be a sustained rally. Picture taken June 8, 2012. REUTERS/Aly Song/Files