Stock Market: China Rising

(Drivebycuriosity) - China´s stock market is on a tear. Last week the Shanghai Composite Index had the biggest two-day gain in five years and climbed 49% year-to-date (bloomberg).

I believe that the sharp China rally has at least 4 reasons:

1. China`s economy is doing better than many expected. From 2011 till last summer China´s stocks have been caught in a pessimism trap because investors have been obsessed with the negative aspects in China and ignored the ongoing strength of the broad economy (driveby). 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" . 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.

I think that this China pessimism bubble popped in the recent months because the predicted China crash didn´t happen so far. Instead China´s economy is experiencing an orderly retreat and has been growing at least 7% p.a..

2. In autumn 2013 the Chinese government started reforms to encourage economic growth and stimulate consumer spending (driveby). In the recent months Beijing announced more reforms, including a liberation of stock trading between Hong Kong and mainland China, and announced more investments into airports, railways and other infrastructure. It seems that the political changes, that have been ignored in the beginning, are getting some attention now.

3. Bejing´s monetary policy is loosening their brakes. Till last summer China`s central bank kept bank liquidity tight and interest rates high to prevent inflation and to curb real estate speculation. In November China´s central bank cut her interest rates - the first reduction in 2 years (!) - and signaled further reductions. I think this is a response to the controlled cooling of the Chines  economy and falling energy price which reduce the risk of of inflation.

4. China is benefitting from the oil price collapse. The country doesn`t have oil, nor natural gas and lacks most of the other important commodities (corn, wheat, iron). After the almost 50% price drop for oil the Chinese have more money to spend for consumer goods, houses & services and Chinese companies, for instance railways, have less energy costs.

I believe that the rally will continue in 2015 thanks to contuing reforms, a more accommodative monetary policy and cheaper oil.