China's Splurge on Transport Hints at Closed-Doors Power Struggle

 | May 12, 2016 | 10:00 AM EDT
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Now nobody has a clue what China is up to.

The Chinese government will spend 4.7 trillion yuan ($720 billion) on transport infrastructure, a popular means of stimulating the economy. That news came from the Chinese Ministry of Transport, who put out a report on its Web site late on Wednesday. Reuters reports that it would pump money into 303 key projects that include railways, highways, airports and urban rail.

The action is at total odds with statements about austerity made on Monday by an "authoritative person" thought to be President Xi Jinping. Those remarks ran in the official state newspaper. At the very best, the messages are mixed. They also hint that there is a power struggle going on behind closed doors in Beijing. 

We know who is likely to win that one. Xi is the most-powerful Chinese leader since Mao, and has launched a crackdown on corruption that some people say is well-intended, but also a helpful cover for him to purge his enemies in the Communist Party. 

Credit Suisse economists Dong Tao and Weishen Deng said in a note that the "authoritative" message came from Xi, prepared by his top spearhead, Liu He. It also said there would be L-shaped growth (i.e. no V or U sudden uptick) for what might be more than one to two years. 

I agree with the Credit Suisse guys that this is not good news for either the Chinese property or stock markets. The Q&A comments said the stock markets, currency exchange rate and property market must return to "their original functionality." Message: we're not going to prop them up. 

China's central government has typically been led by engineers, and they love laying down concrete as China attempts to push its economy forward. The stimulus cash will be splurged on high-speed transport networks and inter-city links. It likely is a budget that was decided well before this week.

So it's good news for Chinese construction companies like China Communications Construction Company, or CCCC. You can play that stock in Hong Kong (HK:1800).

Chinese shares are notoriously volatile. The Shanghai (largest) and Shenzhen (tech-heavy) markets are driven by retail investors, who leap in and out and who used to think the government would always eventually bail them out with stimulus. The "authoritative" message is: that's not going to happen. 

An up year can deliver gains in the order of 60%. But Chinese shares have been on a steady slide since last June, with the Hong Kong-listed iShares FTSE A50 China Index exchange traded fund (HK:2823) cratering 39%. 

Since it's virtually impossible to access A-shares (stocks listed in mainland China), particularly if you're an individual investor, it's a synthetic ETF that mimics the performance of the Chinese stocks.

The largest U.S.-listed Chinese ETF is the iShares Large Cap ETF (FXI), according to ETFdb.com, with $3.7 billion in assets. It has crumpled 37% in the same period.

ETFdb.com tracks 38 China-focused ETFs that are listed in the United States. Next in size is the iShares MSCI China ETF (MCHI), with $1.8 billion. The SPDR S&P China ETF (GXC) is also worth a look, with $669 million in AUM. Then the sizes tail off pretty quickly. 

Chinese stocks will turn and leap when Mr. and Mrs. Chan gain confidence in the market again. But they probably heard about that article. I wouldn't be touching any of those ETFs right now -- unless you're looking to sell them short. 

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