China: Is the Stock Market Ripe For A Melt-Up?

(Drivebycuriosity) - We just finished a great decade. The global stock markets climbed to new all-time highs, lead by the US stock market, which tripled in the 2010s. But there is just one exception - China. The Shanghai Composite, which represents the country`s stock market, lagged badly and finished almost at the same level as it started (charts below)

( source)


Chinese stocks suffered from a bad sentiment towards China - many pundits were calling for a hard landing -, a gradual decelerating economic growth rate (towards 6%), Trumps`s trade war and the government was curbing the economy to restrain inflation and debt levels. But the picture is brightening. The government is loosening the brakes. On New Year`s Day the central bank cut the bank ration reserves again in order to pump more liquidity into the economy. The trade war reached a truce and the latest economic numbers are solid:  Retail sales grew 8% and industrial production advanced 6%.

I think China´s stock market is ripe for a melt-up. There is too much pessimism priced in, which will be disappointed. China`s growth will continue - and might even re-accelerate - because the huge country is continuing her secular catching-up process. China`s growth is inspired by extreme income & wealth differences to the US and other Western nation values. Today China has about $9,800  income per capita, the US number is $62,600  (worldbank). China doesn`t have much commodities but it owns a huge amount of human capital: 1.4 billion people who are intelligent, who work hard and save a lot money to achieve a better life. Wikipedia counted in 2014 already "2,236 colleges and universities, with over 20 million students enrolled in mainland China" (wikipedia). The fast expanding knowledge is driving science & innovation, raising productivity and fostering economic growth (washingtonpost). Chinese corporations, think tanks & administrations can employ a large number of highly dedicated & educated people - a strong driver of economic growth (scottsumner).

China`s growth is fueled by a rapid transformation process.  The country is transforming from an industrial & export-focused economy into a modern system like the US, where most of the GNP is fueled by consumer spending. In the US consumer spending is the engine of the economy. China is on the way to became a modern economy. 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 demonstrate.  And Chinese firms -are leading in emerging technologies like artificial intelligence,  quantum computing, biotechnology & hypersonics which will define the new decade.

To be continued