Thursday, August 8, 2013

Stock Market: China - When Does The Pessimism Bubble Burst?

(Drivebycuriosity) - This morning we got news that China`s economy is getting stronger. In July exports rose 5.1%, imports jumped 10.9% (marketwatch). Both numbers were much better than the economists had expected. Last week we learned that China`s manufacturing & service sector both accelerated their growth (driveby).

But the Chinese stock market doesn`t care. Today the Shanghai Composite Index, which represents the Chinese stock market, closed again in the red. According to Bloomberg this index has tumbled 43% since its temporary peak in 2009. It is funny that the U.S. stocks rose on the China trade numbers today (bloomberg).

It seems that Chinese stock prices are imprisoned by the bad sentiment. Good news is constantly ignored. There is a huge pessimism bubble bloated by the China bears. Blowhards and swashbucklers like Jim Chanos, a hedge fund manager and notorious short seller, and recently New York Times correspondent Paul Krugman, have been banging the "China crash drum" (driveby). According to them, China is suffering from huge structural problems like too high debts and too huge investments into real estate which would cause a "hard landing" of the Chinese economy. The majority of fund managers and other professional portfolio managers seems to believe them.

I reckon that the bear´s view is heavily biased. The pessimists are overstating the problems and are ignoring positive news. China`s growth story stays intact, thanks to the secular catching-up process which is fueled by the still extreme income & wealth differences from the US and other Western nation standards. The Chinese government already started reforms to stimulate consumer spending and is investing massively into infrastructure (railways, telecommunication etc). The recently reported faster growth of the service sector is an early sign that this strategy is working.

Like the Western economies, China gets a lot tailwinds from  technological progress. The country is benefiting from the Internet that makes information much cheaper and easily available which helps the nation to catch-up fast to the Western standards.  "Industries including leisure, e-commerce and transportation are becoming a bigger part of the economy, supporting the government’s efforts to shift the focus of growth away from investment and exports", writes Bloomberg (bloomberg). Fast growing giants like Alibaba (e-commerce) , Tencent (IT-holding) and Baidu (Internet search) are spearheads of China´s advance.

History shows that any bubble has to burst sometime. Therefore it is just a matter of time until the China pessimism bubble pops. I reckon that we will get more positive news from China´s economy in the coming weeks which could be needles in the bubble.

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