Monday, April 22, 2013

Stock Market: Don`t Bet Against China

Pessimism doesn`t know frontiers. Even for fast growing China there is a huge pessimism bubble regarding its economy & stock market. "Bets on declines in the largest Chinese exchange-traded fund are surging to the highest level since 2007", reports Bloomberg (bloomberg). According to this media service there are many speculators who are betting on "a slowdown in the world’s second-largest economy".

I believe that those speculators will loose money. Furthermore I see the growing pessimism for China stocks as an opportunity to invest there and buy Chinese stocks. The negative attitude towards the far eastern economy & stock market is already baked in the depressed stock prices. Chinese stocks are cheap thanks to the continuous selling pressure from the pessimistic speculators.

It seems that many are betting on a so called "hard landing" of the Chinese economy and are following China bears like the notorious short seller and hedge fund manager Jim Chanos who has been banging the "China will crash drum" for years. Because of this pessimism the stock market in Shanghai has been on a downward trend since 2010 and missed the global rally.

I believe the China pessimism is ill funded. In the recent 10 years China´s growth rate didn´t fall below 7.6%. Ok, in the first quarter of the year the growth rate of the Chinese economy had slowed down to plus 7.7 % after 7.9% in the quarter before,  thanks to the sluggish exports to Europe. But in March the Chinese import growth speeded up to plus 14%, a clear sign that the far east economy is still on a solid growth track.

I reckon that the China crash many are betting on is highly unlikely because of the secular catching-up process which is fueled by the still high income difference to the US and other Western nations. The Chinese government already started reforms to encourage economic growth and stimulate consumer spending. Beijing also implemented a huge infrastructure program, including ample investments in railway systems and highways, to support the economic growth. And the Chinese monetary policy got more accommodative because the risks of inflation are constrained - at least for now.  

Hence the Chinese stock market could in the run of this year follow the example of Japan´s stock market that started an impressive rally last October after years of underperformance.

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