Foreign investors navigate turmoil in Chinese markets with new playbook

Thu Sep 3, 2015 8:42pm EDT
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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 and Standard Chartered Plc, 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.   Continued...