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There is a market rule of thumb in Hong Kong that says the further away from China an investor is, the more clear-cut their views and, generally, the more negative those views are. On that basis, a surge this month to 15 month highs in mainland stocks listed in Hong Kong could suggest a lifting of international gloom about China. But chances are it doesn't, at least, not yet.
There are reasons enough to think a more positive upbeat view is deserved. China is enjoying the global cyclical recovery as much as its trading partners. And its domestic economy is also picking up.
Earnings too are likely to improve after an estimated drop of about 9% in 2016. The consensus is for growth about the same this year. The market is also cheap. The benchmark Hang Seng China Enterprises Index is trading on eight times expected earnings compared with 12 for emerging markets globally and 14 for mainland listings.
Those valuations, however, point to another more likely reason for the rally, namely, bargain hunting and in this case, by mainland investors as much as any international money. There are bargains to be had. Mainland investors are less concerned with Hong Kong's cheapness relative to international benchmarks and to their local markets.
Companies listed on both sides of the border trade at an average 20% premium in Shanghai or Shenzhen compared with Hong Kong. And some, including [INAUDIBLE] and China [? Unicom ?] trade at a 50% discount down south, according to Credit Suisse. There are more strategic arguments too.
One such is that in mainland bull-market will soon emerge, pushing Hong Kong higher as government efforts to damp property speculation boost interest in the stock market, instead. But whether it is due to bargain hunting or to mainland strategising, Hong Kong listed China stocks are enjoying their first positive start to the year since 2012. And the more mainland money flows into the city, the less that international gloom about China will matter.
