China Hedge Fund Says Most `Violent' Deleveraging Phase Over

(Bloomberg) -- Shanghai Chongyang Investment Management Co., whose oldest China hedge fund has returned almost three times as much as equity benchmarks, said the nation's stock and bond markets are poised to rally as the “worst” part of a deleveraging process appears over.

“As far as market impact is concerned, the most violent phase of this campaign-style deleveraging is over,” Chongyang President Wang Qing said in an interview with Bloomberg TV in his office atop a skyscraper overlooking Shanghai's financial district. He is “more positive” on the outlook for bonds and “especially the stock market.”

China has embarked on a drive to reduce leverage in financial markets and snuff out systemic risks ahead of a Communist Party reshuffle later this year. Some of the nation's most aggressive dealmakers, including Anbang Insurance Group Co. and HNA Group, have come under scrutiny.

Mainland shares have been dragged down by the campaign, with the Shanghai Composite Index trailing global indexes and Hong Kong stocks this year. The index has rebounded from a low in May, and is up about 5.5 percent this year. Yields on top-rated five-year onshore corporate bonds have spiked, peaking at more than 5 percent in May before easing to 4.6 percent as of Wednesday.

Chongyang manages about 20 billion yuan ($2.9 billion) in assets in mostly long-only A-share funds. One of its oldest funds, opened in September 2008, generated an annualized return of 18 percent from its inception through the end of June, compared with a roughly 6.5 percent annual return for the Shanghai Composite Index.

Taming Debt

Alongside a broad and long-running effort to tame debt levels, a report this year for the Communist Party leadership on avoiding Japan's past economic mistakes recommended clamping down on overseas purchases by some of China's biggest private companies, according to a person who saw the document.

As the deleveraging campaign goes on, officials are unlikely to loosen their grips on financial institutions, according to Wang, who cited pledges to strengthen financial stability highlighted by a key work conference chaired by President Xi Jinping last month. 

“In the last few years, the Chinese financial system and financial markets were characterized by deregulation and financial innovation. With the benefit of hindsight, some of the changes may have gone too far and too quick,” he said. “Chinese financial institutions will continue to be under pressure from the regulators to deleverage, cutting back exposure to shadow banking activities” and wealth-management products, Wang said. 

No Crisis

Wang said he's more positive about A-shares than six months ago and expects market liquidity to improve gradually as concerns about the threat of a financial crisis in China dissipate and short-term borrowing rates decline. Economic growth will remain strong in the second half.

Some of Beijing's measures to rein in large companies were blunt and administrative, but effective in curbing financial risks, he added.

“All those policy measures will address the risk of financial crisis, and therefore help improve market sentiment,” said Wang. “This really helps cut down the risk of tail events, because many investors are really worried about a potential financial crisis in China.”

Beijing's moves to further open up the stock market to foreign investors, as well as the addition of some A-shares to MSCI Inc. indexes, have aided sentiment and will bring in long-term institutional investors, Wang added. He said he likes the consumer discretionary sector and some manufacturing companies with China-developed, but globally advanced technologies.

--With assistance from Zhang Dingmin Shawna Kwan and Ling Zeng

To contact Bloomberg News staff for this story: Charlie Zhu in Singapore at qzhu46@bloomberg.net, Tom Mackenzie in Shanghai at tmackenzie5@bloomberg.net, Haze Fan in Beijing at hfan40@bloomberg.net.

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Paul Panckhurst

With assistance from Charlie Zhu, Tom Mackenzie, Haze Fan