China: How to create a stock bull market

Cross-posted from Investing in Chinese Stocks.

Step 1. Create a massive bull market in stocks
Step 2. Open the capital account just far enough to qualify for inclusion in major stock indexes
Step 3. Global index funds “have” to buy your inflated shares

And, voila, from FT, Vanguard to start buying mainland Chinese equities:

Asurprise move by Vanguard to include onshore Chinese A-shares in its flagship emerging market fund will “put pressure” on other asset managers to follow suit.

Pennsylvania-based Vanguard, which has $3.3tn under management, has said its $50bn FTSE Emerging Markets exchange traded fund, the world’s largest such vehicle, is to adopt a 5.6 per cent weighting to mainland Chinese stocks.

The move follows last week’s decision by index provider FTSE Group to launch a new emerging markets index with an initial China weighting of about 5 per cent, which will run alongside its existing index that has no exposure to A-shares (see table).

Vanguard has opted to switch the benchmark for its ETF to this new FTSE index.

Jian Shi Cortesi, an investment manager at Zurich-based GAM, said Vanguard’s move “puts pressure on other funds to follow suit”.

John Kennedy, investment director of Harvest Global Investments (UK), a subsidiary of Beijing-based Harvest Fund Management, China’s largest institutional asset manager, said: “Everything I read post the [FTSE] announcement was that this was going to be ignored by the world and his wife, so this is potentially quite a revelation.

“To see somebody adopting it within the week is very very important indeed. It will have quite an impact because it’s a very prominent provider. I would expect others to follow.”

MarketWatch, This chart shows just how massive China inflows have been:

The wild ride for Chinese stocks continue, but the stakes have clearly been upped in recent weeks, according to a new chart from Bank of America Merrill Lynch that shows the biggest flows going into the country since the global financial crisis.

In a note entitled, “China in a Bull Shop,” chief investment strategist Michael Hartnett reported Friday that the latest data show equity funds dedicated to the country received $4.5 billion in inflows in the week. That marks the biggest weekly inflow since April 2008.

The long term chart says this style of Chinese equity bull market is not long for the world:

On the other hand, even if Bank of China has a price-to-earnings ratio of 5000 and Baofeng’s price-to-earnings ratio climbs to 6.02214179 × 10²³ index funds are still going to buy.