Stock Market: China - Bloating The Pessimism Bubble

(Drivebycuriosity) - This morning China`s stock market dropped on a five years low. From its peak of around 3,400 points in summer 2009 the Shanghai Composite, a gauge for the Chinese stock market, had been falling around 40%.

The weakness is a reflection of the growing China pessimism bubble. For years the sentiment for China stocks has been bleak. China bears have been continuously banging the "China crash drum" even that the country grew around 7.5% annually so far. Recently the pessimists got some tailwind because the latest export number had a surprisingly sharp drop and production & retail sales grew less than expected, but the numbers may be blurred because of the weeklong Chinese New Years celebrations in February. Today Goldman Sachs bloated the pessimism bubble and cut its growth forecast for China to 7.3% from 7.6% (bloomberg).

I recon that stock market weakness and the gloomy calls are too shortsighted. The China pessimists focus on the current situation and ignore the still bright perspectives of the country. China is rapidly transforming from a agriculture system into a modern consumer economy like  the U.S. and Western Europe.

Last weekend Beijing announced that they will invest more than 1 trillion yuan ($162 billion) redeveloping shantytowns this year (bloomberg). This is a part of their program to boost urban population to support growth. Other measures aim to speed up the construction of railways, expressways and airports to support the rapid urbanization. Yesterday the Chinese government declared that they want to speed up construction projects and “accelerate preliminary work and construction on key investment projects with timely assignment of budgeted funds”. According to Bloomberg this could be a response to the recent cooling signals and an attempt to secure the official growth target of 7.5% for this year (bloomberg). All these steps belong to a wide-ranging reform program which was announced last autumn (driveby).

The recently announced measures - and the whole reform program - should bolster domestic growth and make the country less dependable from erratic export markets. And the recovery in Europe and the ongoing strength of the US economy should deliver some tailwinds. Thus I believe that the pessimism bubble could burst soon and give way to a rally of the stock market in Shanghai.