Wednesday, November 26, 2014

Stock Market Shanghai: Did The China Pessimism Bubble Finally Pop?

(Drivebycuriosity) - China´s stock market is on a tear. The Shanghai Composite Index gained 5% since last Thursday and climbed 23% year-to-date. It looks like the China pessimism bubble is finally popping.

I have been writing for years that the Chinese stock market is trapped in a pessimism bubble (2014/07/) (2013/08) (2012/11)  For around 4 years the Shanghai Composite index, the gauge for China`s stock market,  has been glued to the 2,000 mark, way below its peak of around 3,400 points in summer 2009.

Investors have been obsessed with the negative aspects in China and ignored the ongoing strength of the broad economy. For years China bears like New York Times correspondent Paul Krugman, perma-pessimist Nouriel Roubini and Jim Chanos, a hedge fund manager and short seller, have been banging the "China crash drum"  (driveby). The notorious China crash callers claim that 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.

What has changed?

1. The predicted China crash didn´t happen so far. Instead China´s economy is experiencing an orderly retreat. The growth rate slowed to 7.2% in the 3rd. quarter, after 7.5% and 7.4% in the second and first quarter. This slowdown was intended by the authorities to curb inflation and speculative investments in real estate.

2. Last week China´s central bank cut her interest rates - the first reduction in 2 years (!) - and signaled further reductions. I believe they are responding to the slower growth, sinking inflation rates and dropping oil prices, which reduce inflation risks further.

3. Last year the Chinese government already started reforms to encourage economic growth and stimulate consumer spending (less-mao). Recently Beijing announced more reforms, including a liberation of stock trading between Hong Kong and mainland China, and anounced more investments into airports, railways and other infrastructure (reuters).

I am generally optimistic for China (china). I believe that the growth story stays intact, thanks to the secular catching-up process which is fueled by the still extreme income & wealth differences to the US and other Western nation values. The huge country is rapidly transforming into a consumer economy like  the U.S. and other modern countries. Many peasants are moving to the huge metropolitan centers which are spread all over the huge country to lift their standard of living. This creates a fast rising affluent middle class, giving consumer spending a boost as the strong retail sales (growth rates around 12%) demonstrate. China´s growth should be boosted by the technological progress and advances of Internet, automatization of industrial production and 3D-printing. These developments raise efficiency and  productivity of China´s economy as success stories like Alibaba and Baidu demonstrate.

I believe that the China pessimism bubble will lose more air in the coming months which should foster more gains on China´s stock market.

PS For illustration I used the painting "Landscape" by Mark Tansey

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