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Macro-Catalyst: Why CEPA means money for Hong Kong

Sunday, 10 May 2009

Summary

This is a trade with a one month view.

Readers outside of Hong Kong need to know today's local headlines: Beijing has agreed to allow mainland money to flow officially into our stock market. 

We discuss whether this measure can improve the  Economic Time® in Hong Kong and in America.

Learn how to make money easily and quickly off this idea. 

Topics Covered

  1. What happened
  2. Be aware of ...
  3. Effects on Hong Kong's Economic Time®
  4. How to make money off this macro-catalyst

Background

1. What happened

Beijing wants Hong Kong to keep flourishing. One key, Chinese-pragmatic way is via stronger economic ties.

Thus, for some years already, China and Hong Kong have created and implemented  the Closer Economic Partnership Arrangement (CEPA).  

For the first time within this CEPA framework, both sides formally have agreed  to launch an " 'index-tracking exchange-traded fund' backed by portfolios of Hong Kong-listed stocks..." (Sunday Morning Post, 10th May 2009, p. 1). 

The bottom line: mainland Chinese soon will be allowed to buy ETFs that track the Hang Seng Index. That will make the Hang Seng Index rocket on the thrust of sentiment. 

2. Be aware of...

So buy into this story on a short-term trading view. All that glitters is not gold, however. Beware of the following:

  • Implementation only in 9 months. China's and Hong Kong's regulators will explore the creation of such ETFs only as of this October. It will take them a long time to agree on the exact regulatory and legal changes which will govern such ETFs. So my hunch is that such ETFs will be operational only in December of this year;
  • Trickles, not torrents. By allowing mainlanders to buy the Hang Seng Index via ETFs, Beijing officially is permitting capital outflows. Readers know of our misgivings about the sustainability of a strong RMB against the backdrop of capital outflows. So my guess is that Beijing will allow these ETFs, but that individual investors will be able to invest only small amounts of their RMB...,  and 
  • Sell in May and go away.  Readers know of our mistaken disbelief in the market rally since March. We (stubbornly?) cling to this view, as we see no real "green shoots", but we see a much "wishful thinking". 

3. Effects on Hong Kong's Economic Time®

Our three misgivings suggest that this is a short-term trading idea driven by the "signal effect" of Beijing's intentions to allow mainlanders officially to buy into Hong Kong's stock market. 

However, anyone living here will report that there are tons of mainlanders already spitting, yelling and elbowing their way through Hong Kong, indicating that there is plenty of "un-official" money coming in from the mainland. Besides, once the ETFs are allowed, my guess is that citizen "Zhou normal" in China only can invest small amounts.

For these two reasons, do not believe that the launch of such ETFs can change Hong Kong's  Economic Time from its current excess demand for money to an excess supply of money: banks still don't want to lend, and won't want to lend until America's Economic Clock® signals a sustainable "buy". That is a long way away...

 

4. How to Make Money Off This Macro-Catalyst

  1. Always consult your financial adviser first.
  2. Buy the Hong Kong Tracker Fund, 2800:HK.  It replicates the Hang Seng Index (HSI), which, in turn, will be the basis for that ETF which we discussed above. (Other ETFs may follow; we will keep you posted.)
  3. Alternately, buy the best performers in the HSI. Subscribers may get the list for free from us as part of our appreciation of your patronage. 

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