China Pessimism Bubble: The Return Of Stock Market Shanghai?

(Drivebycuriosity) - It looks like the China Pessimism Bubbly is finally popping. Last week the Shanghai Composite Index gained 4.9%, the biggest weekly advance since February 2013 (bloomberg).  The gauge for the Chinese stock market climbed 10% year-to-date and rebounded 17% from a trough reached in March 2014. But the index is still way below its peak of around 3,400 points in summer 2009. For around 4 years the Shanghai Composite has been glued to the 2,000 mark.

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 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.

So far China avoided the so-called "hard landing". In the second quarter of 2014 China´s economy grew 7.5%, after plus 7.4% in the first quarter. Last week we learned that the service sector there gained speed, helping the transformation to a modern consumer focused economy and reducing the dependency from exports and erratic global markets.

I am generally optimistic for China. 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 the productivity of China´s economy as success stories like Alibaba and Baidu demonstrate.

Last year Beijing announced a new economical reform to bolster China`s transformation (driveby). "The Economist" calls the announcements the most wide-ranging and reform-tinged proposals for economic and social change in many years. According to Bloomberg the announced changes are aimed at giving more influence to market forces and loosening government controls.

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.  Maybe in the recents days China´s started again a rally - as it did in the years 2006 and 2007 when the Shanghai Composite more than tripled.