Cam Hui, a portfolio manager at Qwest Investment Fund and the writer of investment blog Humble Student of the Markets, has recently written about his bearish views on China and said he was watching closely HSBC stock. Though he doesn’t think the “panic button” was hit yet, he is watching the developments closely.. His interesting opinion below:

“Here is one offbeat way that I am watching for signs of stress in China’s shadow banking system. I am watching the share price of HSBC. While HSBC is a global bank, it has deep roots in Hong Kong and Asia. For newbies, HSBC stands for Hongkong Shanghai Banking Company. It is a bank that was firmly established in Hong Kong. As a child, I can remember driving by the bank’s headquarters in downtown Hong Kong in the 1960’s.

Stresses in the Chinese financial system is likely to show up in the share price of major financials that have exposure to China and Asia, like HSBC. The stock has been falling rapidly in the past couple of weeks, which is not a good sign.

To put the stock performance into context, I charted the performance of the stock relative to the BKX, or the index of US bank stocks. HSBC has been in a relative downtrend, but the lows of 2009 have not been violated. I interpret this as the market signaling that while there may be signs of trouble, it is not panicking.”

A few days later, Mr. Hui discussed this idea with an investment banker who told him that the best barometer for the China story is not HSBC but other Chinese banks:

“A Hong Kong based investment banker informs me that HSBC is not thought of as a good gauge of the risks to the Chinese financial system as the bank had diversified its exposure. Better to watch the Chinese banks listed in Hong Kong, such as: 

  1. Agricultural Bank of China (1288.HK)
  2. Bank of China (3988.HK)
  3. China Merchant Bank (3968.HK)
  4. ICBC (1398.HK)

Right now, none of the shares of these banks are falling in a way that suggests market fears of an uncontrolled implosion of the shadow banking system. But watch this space!”

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