China Pessimism Bubble: The Reality Check 2014

(Drivebycuriosity) - Last week Paul Krugman was proven wrong again. A year ago the Nobel Price winner and New York Times columnist predicted that China`s economic growth will hit a wall (nytimes). Wrong. In the second Quarter of 2014 China`s economy grew 7.5%, a slight acceleration to the first quarter (plus 7.4%). Last week we learned that China´s manufacturing is speeding up again (reuters). The British bank HSBC reported that China's factory activity expanded at its fastest pace in 18 months in July (measured by their Manufacturing Purchasing Managers' Index which climbed to 52). Other indictors like retail sales (plus 12% year-over-year) and industrial production (plus 9%) also signal that China`s economy is still growing with a solid pace.

The fundamental data also refute Jim Chanos. The notorious short seller and hedge fund manager has been banging the China Crash drum for years. Krugman & Chanos are just a part of the huge crowd of China bears, who have been predicting China´s "hard landing" even that China´s economic growth rate has been continuously above 7%. The China pessimists focus on structural problems like too high debts and too large investments into real estate. But they ignore the robust growth and the sound fundaments behind China´s economic advance.

Today the Chinese stock market is trapped in this pessimism bubble: From its peak of around 3,400 points in summer 2009 the Shanghai Composite Index had been falling around 40% to around 2,000 points through the end of 2012. Since then the stock market gauge has been glued to the 2,000 mark. The Shanghai Composite is now valued at 7.9 times 12-month projected earnings, compared with the five-year average multiple of 11.3, writes Bloomberg (bloomberg).

I think it is just a matter of time that the China pessimism bubble has to pop and China´s stocks could start a rally again - as it did in the years 2006 and 2007 when the Shanghai Composite more than tripled.

                                                               

                                                                Catching up Process


China is in the middle of long term catching up process.  The huge country has a tremendous backlog demand because income & fortune are much lower than in the western world. There are more than a billion of talented & diligent people who want to reach the US and European standards. Therefore these people are working hard and investing to be able to expand their consumer expenditures in the near future.

China is now rapidly transforming into a consumer economy like  the U.S. and other modern countries. This transformation process should foster China`s growth for years. 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 solid retail sales 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 the productivity of China´s economy as success stories like Alibaba and Baidu demonstrate.


And there is more. Last year Beijing started a wide-ranging reform program to initiate a lot of economic and social changes including giving more influence to market forces and loosening government controls (driveby) The Chinese government started the orderly opening up of the finance, education, culture and health sectors. Restrictions on investing in child care and elder care, construction and design, accounting and auditing, logistics and e-commerce will also be relaxed, as will limits on market entry for manufacturing.

I believe that catching up, transformation, reforms and technological process will generate enough boost to keep China growing for years which creates a lot of investment chances on China`s stock market.