Investors considering getting into Chinese markets at the moment – at a time when share prices have dropped and there could be bargains for discerning buyers – should look for companies that are cash-rich and have little debt, an analyst in Hong Kong has said.
In an interview with Bloomberg TV, Uwe Parpart, chief strategist for Seven Stars Cloud, said: “Global interest rates are going to rise, including in China, or certainly in Hong Kong, because of the Hong Kong dollar peg to the US dollar. So, as soon as the Fed raises rates, the HKMA [Hong Kong Monetary Authority] has to do the same thing.
“So you [investors] want to look at companies that are cash-rich, you want to look at companies that have very little debt, or have manageable debt. And then you pick those, and yes, you go in right now. And I think you’ve got to make sure there are no other real issues that you have to worry about.”
Asked about risks in regard to brokers moving to liquidate ‘pledge shares’ in the Shenzen market, Parpart said they were a problem that was equivalent to margin debt.
“If you look at the SMP [Securities Market Programme – a European system to purchase bonds on secondary markets], that’s also a bad problem, because margin debt and SMP is at about the same level as this kind of debt in the Chinese markets – around $700 billion. And that’s a lot of debt, sitting on the margins. And if you start facing margin calls or pledge calls or whatever you want to call them here, then there’s a lot of liquidation. And it makes a bad situation worse…
“But I think we should put that a little into perspective, which is why I mentioned the SMP margin debt, because that’s high, but it’s not as it was in 2007, that led into the 2008 crash.”
Uwe Parpart is also editor of Asia Times.