Enis’s Macro Wrap – Massive Hang Seng / Shanghai Divergence

by Enis November 27, 2012 7:47 am • Commentary

In an otherwise relatively quiet overnight session, the Shanghai composite broke down to levels not seen since 2009.  Here is the 5 year weekly chart:



It’s a very steady 3 year downtrend, eerily steady in fact.  Normally, you would see more volatile prices on the way down, steady on the way up, but that has not been the case in the Shanghai index.

What’s more interesting to me, though, is the huge divergence between the Shanghai index and the Hang Seng index in Hong Kong (the A-shares vs. H-shares, in industry parlance).  The Shanghai market is the domestic Chinese stock market, essentially closed to most foreigners except select financial institutions.  The Hong Kong market is the primary vehicle through which foreigners access Chinese stocks.  As a result, there will often be differences in the A-share vs. H-share valuations of the same company.  The investor bases are drastically different, and there is no rule that requires the two share classes to trade closely together.

BUT, historically, the two share classes have shown a high correlation.  After all, either share class is a bet on Chinese companies’ profits.  Yet, here is the 3 year chart showing the Hang Seng in index in green, and the Shanghai index in orange:



While the 2 indices closely tracked each other until the start of 2012, the Hang Seng is up 18.5% in 2012, while the Shanghai is down 9.5% year-to-date after last night’s 1.3% decline!

The divergence shows that domestic Chinese investors have much less confidence in Chinese equities relative to foreigners.  Foreigners involved in China should be wary; if anyone is the sucker at that poker table, I have a hunch it’s not the domestic player.

Markets overnight:

  • The European finance ministers basically agreed to ease the terms on Greece’s debt, though markets hardly reacted as the deal was telegraphed over the past week.
  • Asia was mostly green outside of China, in a quiet session
  • Europe has traded in the green all session, following the strong afternoon in the U.S. yesterday.  SPX futures are basically unchanged, and have traded in a tight 6 point range overnight
  • The dollar, Treasury bonds, and commodities are all essentially flat
  • Durable Goods Orders data will be released at 8:30 am EST, housing price data at 9:00 am, and Richmond Fed and Consumer Confidence at 10:00 am