China Financials

China financials look cheap or with potential bullish patterns. The wildcard here is like with Japan: is there a nomainal breakout coming that will be fueled by currency depreciation?

Here is the U.S. China Financials ETF, CHIX, sucking wind. It could have a long way to rally if China's markets rise and the currency rises.

At this stage I'd prefer nominal exposure with a currency hedge. I think the current bear market rally around the world would have to transform into an actual bull market, complete with weaker USD and emerging market outperformance, for a pure long China trade to pay off with low risk. That said, looking at something like Shenwan (a stock I liked way back in the 2014 time frame), my sense is a nominal bull market will deliver enough gains to offset currency devaluation. Financials usually get destroyed in currency devaluation/high inflation scenarios, but maybe Chinese banks are so weak and priced cheap for their risk, that high inflation/currency deval would lift that risk.

Investors Excited For Cross Border Stock Trading

In contrast to the real estate market, the stock market is a cornucopia of opportunity. Although some Investors hesitate before Shanghai-HK stock link, there is always arbitrage:

Despite all kinds of hesitancy, data point to an arbitrage opportunity. "Currently, A-shares are much cheaper than H-shares," said Lu Wenjie, strategist of UBS. "Average valuations of H-shares used to be 30 percent cheaper than their mainland peers, but now it's about 10 percent more expensive. The A-H premium is at record high."

Hang Seng China AH Premium Index closed at 91.90 on Monday, which means an 8.1 percent discount for A-shares compared with H-shares on average. "Some blue chips on the mainland, such as banks and resources companies, are now 15 to 30 percent cheaper," Lu said. "The opportunity is great for these stocks to pick up. After the stock connect starts, we estimate valuations of A-shares to step up as much as 5 percent above their Hong Kong-listed counterparts.

My two picks from last September, First Shanghai (0227.HK) and Shenyin & Wanguo (0218.HK) when the financial reforms were announced, finally moved when this news became concrete. A lot of investors are clearly not hesitating. Those stocks had done nothing until April 2014, when the through train was first announced. At this point, the A share market is more attractive. If this opening revives Chinese interest in the stock market and the real estate market stays cool, a big shift in sentiment could unfold.