Asia Stocks to Watch

Nov. 16, 2011, 11:27 p.m. EST

Where you stand on China depends on where you sit

Opinion: Shorting China

Western investors are questioning the whole culture of China's economy and regulations, says Joseph Sternberg.

Alongside these changes, however, there’s also a deep concern, with fund managers of all stripes watching developments in China and engaging in a lot of debate, Han said.

Han says recently there been a lot of curiosity on China’s social stability and whether income inequality and inflation are stoking tensions that could soon boil over.

For the most part, overseas clients tend to see the risks as potentially more disruptive to China’s growth, even though awareness of what could go wrong is widely available throughout the investment community.

“There is a natural inclination for a bias that things will continue to be bright versus perhaps a Western manager, who is looking at things from a bird’s eye view,” Han said.

Piper Jaffray Asia Securities sales trader Andrew Sullivan agrees that local investors are “more optimistic” than those overseas, citing recent talks with clients.

He says big headlines on China’s “ghost cities” of vacant properties, sparsely attended shopping malls and empty five-star hotels might be offering an overly dramatic view of some excesses.

Sullivan compares it to Asian investors who are more likely to balk at the idea of investing in the euro zone than their European peers, even as some opportunities emerge from the region’s sovereign-debt crisis.

“If you go across the [Hong Kong-Guangdong province] border often enough, you can see the warts on China, but you know it actually works quite well,” Sullivan said.

Many local investors also have a longer investment time frame than overseas managers, in some cases lasting years. Such a margin can be a luxury to a portfolio manager who gets a market call wrong, said Sullivan.

Grinding, range-bound markets can frustrate a typical London-based fund manager who faces quarterly or half-year performance reviews, as well as an investment mandates that divides attention into different geographical regions, he said.

Sullivan added that investors who hold bearish views are having trouble reconciling the soft landing talk that’s emerged as a common theme among analysts who cover China.

“People have been expecting the bubble to burst, but is hasn’t burst as fast a people have thought,” he said.

Market conditions don’t currently favor short sellers, a factor that could explain the lack of interest from some investors.

Louis Capital Markets sales trader Michael Hsia said hedge funds who use strategies that bet stock prices will decline tend to prefer higher trading volumes and stronger liquidity.

“When it come time to unwind these [short] positions, the footprint is there and they need a decent period of time,” said Hsia, referring to the Hong Kong market.

The currency markets are another indicator of sentiment towards China, with the spread between the offshore yuan in Hong Kong and its onshore counterpart, frequently cited by analysts as the market’s outlook on China’s fortunes.

Still, while China-based investors may be more familiar with the local economy, only time will tell whether the view is realistic or too rosey.

Newedge’s Han said it wasn’t clear whether locally based fund managers were making better investment decisions than their more skeptical counterparts in the West, in terms of equity and other asset prices.

In fact, those who live further away might even have “a more objective view” of China, he said.

An upturn in hedge funds opening offices and raising capital in Asia showed the global industry was starting to set up stakes in the region in earnest.

This, Han said, is a trend than may also help explain “a general inclination ... to be bullish” on the future of Asia.