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By Tim McLaughlin and Ross Kerber
BOSTON, Sept 3 (Reuters) - Foreign investment funds aremoving at breakneck speed to retool their strategies in anattempt to profit from Chinese stock markets whipsawed by panic,paranoia and unprecedented government intervention.
The implosion in Chinese equity prices after a domestic,debt-fuelled buying binge has triggered a range of responsesfrom foreign investors.
Those who remain bullish on China's long-run economicprospects have switched more of their focus to the Hong Kongmarket because valuations are lower, it is better regulated, andless prone to the whims of officials in Beijing than themainland markets in Shanghai and Shenzhen.
Funds that see the recent declines in the yuan, Chineseasset prices, and the nation's exports as a harbinger of muchmore economic pain to come are responding with an array ofmaneuvers. Those include betting against the currencies of Asiantrading partners, and shorting British banks HSBC Holdings Plc and Standard Chartered Plc, who both have bigexposure to China.
Some are even buying U.S. mortgage-backed bonds on theexpectation that rich Chinese will take money out of China andpour it into U.S. real estate as a safe haven.
The investors who are betting against China or have given upon it as an investment destination are in the minority, though.
Despite all the problems, the Chinese economy is stillexpected to grow at around 7 percent this year, based onofficial figures. That can't be sniffed at given the downturnsin many other major economies, such as Brazil, Russia andCanada, and only modest growth in the U.S. and Europe.
That doesn't mean many believe it is safe to trade themainland markets, where the Chinese authorities have crackeddown on short selling, detained a journalist for spreading falseinformation and re-routed pension money into equities.
"The recent volatility I think has cooled the ardor of somebecause they are realizing what an unusual instrument theShanghai Stock Exchange is," said William Kirby, a HarvardBusiness School professor who studies China and is involved withseveral funds that invest in the country, including as adirector of the $248 million China Fund Inc.
"It appears this (Chinese) administration sees stock marketsas instruments of state policy," he said, adding that hiscomments reflected only his personal views.
The safer alternative is seen as Hong Kong. The Hang SengIndex, the mainstream index for the territory's market,has dropped 24.3 percent over the past three months, compared toa 36 percent slide for the Shanghai SE Composite Index and a 45 percent fall in the Shenzhen SE A Share Index.
A NEW UNIVERSE
BlackRock Inc, the world's largest asset manager, issnapping up shares of Chinese companies listed on the Hong Kongexchange after the recent declines, said Jeff Shen, head ofemerging markets for BlackRock. "We think it's a value play."
Bobby Bao, who runs the $1.3 billion China Region Fund for Boston-based Fidelity Investments, is stillhunting for value in the mainland markets, though only incertain high-growth sectors. He is particularly interested ininvestments that will capitalize on China's demand for personalconcierge services, ranging from make-up application at home tocar washing and in-house catering.
In recent months, he has bolstered his stake in HangzhouHikvision Digital Technology Co Ltd, the world'slargest maker of surveillance cameras that's listed on theShenzhen Stock Exchange. He cited the company's 40 percentcompound annual growth rate and the rapid expansion in theinstalled base of security cameras.
In July, though, the company called off its planned $1billion initial public offering on the Hong Kong exchangebecause the territory's H-shares trade at much lower valuationsthan mainland A-shares. The valuation gap is one of the reasonsforeigners have not been big investors in mainland-listedcompanies, even before the recent plunge.
Indeed, overseas funds are estimated to hold only about 1percent of the $7.8 trillion total valuation of all stockstraded on mainland China's markets, according to Zhiwu Chen, afinance professor at Yale University's school of management.
For those fund managers wanting to tap into Chinese consumerdemand, some e-commerce companies are still attractive.
"The Chinese love to buy things online and this sector has alot of upside," said Joe Quinlan, chief market strategist atBank of America wealth management unit U.S. Trust.
SHORT BETS
With Chinese authorities cracking down on what they call"malicious" short sellers, foreign investors are steering clearof any short strategies on mainland markets.
For those that want to take a bearish punt on China thereare other, less controversial avenues.
Tracy Chen, portfolio manager of the $935 million Legg MasonBrandywine Alternative Credit fund, said China'sslowing economy prompted her last month to short the currenciesof a number of its Asian trading partners, expecting they willdecline as they take steps, such as cutting interest rates, tostimulate their own economies.
Her fund has also made short bets on HSBC and StandardChartered plc because of their big presence in theGreater China region.
Andrew Lee, deputy head of the ultra-high net worth andalternative investment office at UBS Wealth Management in NewYork, said that the Australian dollar also is beingshorted by some hedge fund managers. The currency has beenfalling, partly because of slack Chinese demand for Australianmetals and minerals.
The Canadian dollar is also being targeted by someinvestors for similar reasons, said Eric Stein, co-director ofthe global income group at Boston-based fund firm Eaton Vance.
One safe-haven strategy that hasn't performed as well as inthe past is buying U.S. Treasuries.
"They haven't done so well in the last month or so," Steinsaid. Some investors speculate that the Chinese government hasbeen selling U.S. Treasuries and buying yuan to keep thecurrency from selling off.
Chen, meanwhile, said she has been buying moremortgage-backed bonds as she expects wealthy Chinese investors,who have already been active in North American real estatemarkets in recent years, to step up their purchases anothernotch as a hedge against further trouble in China. (Writing by Tim McLaughlin; Additional reporting by Svea Herbstin Boston; Elizabeth Dilts, Lawrence Delevingne and JessicaToonkel in New York; and Simon Jessop in London.; Editing byCarmel Crimmins and Martin Howell)
