Saturday, August 10, 2013

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

(Drivebycuriosity) - Yesterday the price of oil jumped 2.5%. According to Bloomberg the energy market responded to economic news from China (bloomberg). Factory output there increased 9.7% in July. The acceleration in Chinese factory output followed a series of positive figures, Bloomberg also wrote (bloomberg). Retail sales climbed 13.2% in July, other indices showed that the sectors manufacturing & services both grew faster recently (businessinsider driveby). All data are signals that China is gathering speed again.

The stock market in China barely blinked. Yesterday the Shanghai Composite Index, which represents the Chinese stock market,  gained mediocre 0.36%. Year to date it dropped 9.6%. According to Bloomberg this index has tumbled 43% since its temporary peak in 2009 even that China´s growth didn`t fall below 7.5% in the recent 10 years (bloomberg).

It seems that China´s stock market is trapped by a gloomy sentiment (driveby). China bears like Jim Chanos, a hedge fund manager and notorious short seller, have been banging the "China crash drum" for years. Even the influential New York Times (Krugman column) joined the crowd, that predicts a "hard landing" of the Chinese economy (driveby). The majority of fund managers and other professional portfolio managers seems to believe them.

Hence pessimistic speculation overtrumps the positive facts. This is typical for a bubble where prices don´t reflect the fundamentals and instead are dominated by opinions. In this case the pessimistic herd caused a pessimism bubble.

I reckon that this bubble will increasingly be tested by more good news. China is benefiting from the Internet that lowers the cost of information significantly. Hence the world wide net helps the nation to catch-up quick 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).

I would not be surprised if the China pessimism bubble would pop through the end of the year and the deeply depressed the Shanghai Composite Index would follow the upswing of the global stock markets.

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