Stock Market: Shanghai Awakes

 (Drivebycuriosity) - It seems that the stock market in China is awakening again. This morning the Shanghai Composite, which represents the Chinese stock market, jumped 5.7% (cnbc). The rally started already in April and the gains have been accelerating in the recent days, eliminating the losses from February & March. Year-to-date the index climbed  9% .

(source )

The gains on the Chinese stock market are not surprising, they mirror the fundamental improvements in China. The country was the first which got hit by the COVID-19 Pandemic, but it also belongs to the first which got rid of it. In the recent days China reported fewer than 10 new known cases per day ( worldometers ).

( source)

The success on the corona front allows the reopening of economy and gives way to a recovery. Last week we learned that "the Caixin China General Services PMI jumped to 58.4 in June 2020 from 55.0 in the previous month, pointing to the strongest growth in services activity since April 2010 (charts below). "New orders grew the most in nearly a decade as companies reported that greater customer numbers were resuming more normal business operations. In addition, export sales rose for the first time since January, amid improving global demand" ( services). This barometer shows the current development in the service sector, which accounts for more than half of the Chinese economy and is therefore more important than manufacturing (like in the US).

( source )

China´s stock market is still way below the peaks of the past (chart below). The past rallies got killed by new waves of pessimism. Apparently the stock market followed the skeptics who don´t believe in China`s  sustainable economic growth. The COVID-19 pandemic, which ended the rally attempt from December 2019, seemed to support the negative views.
.

( source )

It looks like that China is back on the economic growth trend of the recent years.  China`s growth story is still intact, thanks to the secular catching-up process which is fueled by the still extreme income & wealth differences from the US and other Western nation standards, and ongoing economic reforms & huge investment into infrastructure. The economy might even get stronger when the corona crisis has past. History shows that consumer and businesses are more willing to change behavior during setbacks (twitter). Innovations typically gain traction during tumultuous times: they get cheaper, faster, more convenient, more productive, more creative.  Companies are streamlining operations and are getting more efficient & productive as they always do when they are challenged.

People, who were forced to stay at home for a while, will use the internet for work, shopping and entertainment more often & intense. This way the virus will boost the digitization process which already has been driving China`s transformation process on her way to become a modern economy where most of the national GDP is created by the service sector (like the USA, UK, Germany and other Western countries). The digitization will drive productivity growth across all industries, leading to more economic growth (driveby).