Chaos in China

Investors returning from China's Golden Week holiday were initially greeted with what appeared to be an auspicious sign: a remarkable 10% jump in the CSI 300 index before the highly anticipated press conference of the National Development and Reform Commission (NDRC).

The NDRC is the agency that worked out the specifics of Beijing's monumental 4 trillion yuan (equivalent to $586 billion) infrastructure investment plan back in 2008. . This time, however, the funding only came to 200 billion yuan, falling significantly short of analysts’ estimates for the projected fiscal package to be nearly 3 trillion yuan.

Investors did not react well to the shortfall sending Off-Shore Chinese equities spiraling. The Hang Seng Index fell 9.41% in trading earlier this morning. This is the worst day since October 2008 & one of the worst in the index's history. The move marked a -6(!!) StDev move.

This massive selloff comes immediately on the back of what had been a nearly 30% run up for Chinese equities in just the prior two weeks. In fact, Chinese stocks had outperformed the rest of Emerging Markets by +6StDev over that time… Successive moves of this magnitude are a sign to us, at least, that the market is best avoided until the more structural issues are resolved.

That said, many others are more confident in Emerging Markets. In fact, just last week we witnessed the 2nd largest weekly inflow to EM equity funds ever.

However, as the kind of move we had seen from Chinese stocks tends to catch investors’ eyes, we felt that it more likely that it was not broad EM that appealed to investors. More likely was that the flashy returns of late was taken by some as the “all-clear” sign in the ongoing debate over China’s current invest-ability. Upon looking into the flows more granularly, we can see that was indeed the case.