Archive for August, 2009
The Shanghai Composite Index continues to give the world jitters. Several news sources are now fretting that a “bear market” in China means trouble for the whole world. Of course that’s not the case. China is on a world-beating growth trajectory.
Keep in mind, the Shanghai Composite Index (SCI) has now enjoyed two days of upward movement after suffering some sharp declines. As a leading indicator of economic expectations, the SCI jumped by a spectacular 90% from its lows last year, before undergoing a painful correction in the past few weeks. The steepness of this correction did pull back on the performance of some China Stock Digest ADRs.
But the outlook for the Chinese economy remains the best in the world. A government think tank has just disclosed its latest prediction for the third quarter of the year. The outlook would make any western nation envious. The State Information Center says China’s gross domestic product will grow about 8.5 percent in the third quarter from a year earlier. That’s well up from the second quarter’s 7.9 percent pace.
But the Associated Press and USA Today are still circulating anxious stories that China’s stock market correction is a gloomy leading indicator for the world economy. As one source put it, “ if investors in China — the strongest major economy — were dumping shares and losing confidence, then prospects for other markets and economies were dim.”
While it is novel to see some acknowledgement of China’s important role in the global economy, the idea that the Chinese stock market could signal world economic performance is ludicrous and should be ignored.
As we have noted in previous postings, the rise of China’s internal markets is due in part to a flood of money released by Chinese banks on government orders. There is speculation that this torrent of money may be reined in. Chinese shares do not reflect global valuations because they are not tradable by foreigners. Shanghai was due for a correction due to severe over-valuation compared to ADRs and Hong Kong stocks.
None of these factors weigh on the global economic outlook. Nor do they reflect the real-world performance of Chinese companies.
The SIC says the Chinese economy has bottomed out, but as strong as it is, the economy is still growing below potential, mainly due to weak exports. Exports will fall 20 percent in the third quarter, compared with a year earlier, with imports dropping 12.7 percent, according to the think tank’s forecast.
The SIC outlook does highlight some concerns. Capital spending will remain a key driver for China’s economy, and urban fixed-asset investment is likely to rise 32 percent in the third quarter. Such heavy capital investment will worsen many deep-rooted problems, including over-capacity.
The SIC highlights the steel-making and cement sectors as suffering from serious over-capacity. Obviously these are investment areas to avoid.
Over investment may also cause inflationary bubbles in sectors such as real estate. However the Chinese economy as a whole remains remarkably free of inflation worries. The SIC says, “China’s CPI has been falling for many months, and it’s a fact that mild deflation exists.” The agency forecast that the Consumer Price Index will drop by 1.3 percent this quarter from a year earlier, and the producer price index will decline 7.9 percent.
The freewheeling printing of money in the United States indicates a stronger danger of inflation on this side of the Pacific than in China.
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Shanghaied by Shanghai!
Shanghai’s key stock index is enduring unprecedented volatility after registering its biggest weekly loss since February. Today, the Shanghai Index rebounded and ended above 2,900 points after yesterday’s slide. On Monday China’s main stock index tumbled another 5.8%, leaving it down 16% for the month. At the end of last week, Shanghai tumbled three percent, or 93.59 points, to 3,046.97 at the end of the last trading week.
The Shanghai Composite Index has now dropped to its lowest close in six weeks. The volatility in Shanghai is unrelated to foreign markets because shares cannot be traded (arbitraged) across exchanges. Shanghai is a liquidity-driven casino at this point, but it is dragging down dome of our ADRs.
As you may remember, many China investors have been flocking to mutual funds which invest in the Shanghai market. The reasons were obvious enough. The Shanghai Index was the best-performing in the world, with gains that peaked above 90% for the year.
We cautioned against buying in several weeks ago, warning subscribers of a possible bubble developing on the Shanghai Stock Exchange. As we said, the valuations of corporations traded in Shanghai, Hong Kong and New York were out of line. Valuations were dramatically higher in Shanghai than in other centers for specific companies and for comparable companies.
Another warning sign of investor frenzy is the number of new retail investor trading accounts being opened. Investors opened almost than two-and-a-half million new accounts to trade stocks in the four weeks before August 7th. That’s the greatest investor stampede since the Shanghai bubble of December, 2007.
Various business news outlets are now speculating about whether the downturn in Shanghai is a brief “correction” or the beginning of a protracted downturn. Many Chinese analysts are saying that Shanghai is merely in correction mode and will resume its rise in the near future.
That’s not a safe bet. There are number of reasons to worry about continuing declines or stagnation. The pending launch of a NASDAQ-like Growth-Enterprise Market may divert capital out of the main exchange. The unlocking of new IPOs which initially caused a rush of excitement may also dilute available capital. In addition, millions of so-called untradeable shares are due for release, creating further strains on liquidity.
Adding to the pressure on shares in China is the worry that a lot of market speculation has been fueled by high-volume bank lending brought about by a government decree. Although Premier Wen Jiabao has pledged to continue China’s “relatively loose” monetary policy, the volume of new bank loans may be declining. The deputy head of the country’s statistics bureau says China must be careful to keep its economy from overheating because that could fuel a spike in inflation, adding to pressure in Beijing to tighten monetary policy.
With Shanghai shares still trading above international valuations, there is room for further market declines. The Shanghai Index is below its 50-day moving average with little apparent momentum to change direction.
A-shares, traded in Shanghai, cannot be purchased by foreigners but several mutual funds do give access to the Shanghai Composite Index. It appears that buying these funds now would be, at best, buying into a bubble – at worst buying into a bursting bubble.
What Shanghai’s Sell-Off
Frenzy Means for the U.S. INVESTORS
Analysis and Commentary from Leading China Expert Jim Trippon, editor of the China Stock Digest.
FACT: Shanghai’s key stock index registered its biggest weekly loss since February, last week. Today’s China’s main index tumbled another 5.8%, leaving it down 16% for the month, its lowest close in six weeks.
FACT: Many US investors have been flocking to mutual funds which invest in the Shanghai market. The reasons are obvious. The Shanghai Index was the best-performing in the world, with gains that peaked above 90% for the year.
Q. What are the possible reasons for the sudden drop in Shanghai’s Market Index?
A. “We cautioned our subscribers weeks ago of a possible bubble developing on the Shanghai Stock Exchange. As we said, the valuations of corporations traded in Shanghai, Hong Kong and New York were out of line. Valuations were dramatically higher in Shanghai than in other centers for specific companies and for comparable companies.”
Q. Does this mean we are in a minor correction or the start of another bear market for China equities?
A. “Many Chinese analysts are saying that Shanghai is merely in correction mode and will resume its rise in the near future. That’s not a safe bet. There are number of reasons to worry about continuing declines or stagnation. The pending launch of a NASDAQ-like Growth-Enterprise Market may divert capital out of the main exchange. The unlocking of new IPO’s which initially caused a rush of excitement may also dilute available capital. “
Q. Has China’s bank lending policies fuelled a bubble in the Shanghai market?
A. “It certainly looks like this is the case. China’s banks lent $1.1 trillion in the first half of 2009, some of which ended up in speculative stock positions of the borrowers. It remains to be seen how China will refocus their stimulus efforts in the second part of this year. The deputy head of the country’s statistics bureau says China must be careful to keep its economy from overheating because that could fuel a spike in inflation, adding to pressure in Beijing to tighten monetary policy.
Q. What other signs of worry are there?
A. “Another warning sign of investor frenzy is the number of new retail investor trading accounts being opened. Investors opened almost than two-and-a-half million new accounts to trade stocks in the four weeks before August 7th. That’s the greatest investor stampede since the Shanghai bubble of December, 2007.”
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PERSONAL NOTE FROM JIM:
As I have predicted, China will lead the world out of the recession. Each and every day there are more signs that I am spot on with my assessment. The Shanghai Composite Index is rising faster than opposition to Obama’s new health care plan, and here is the latest from Hang Seng Index. Take a look at the amazing numbers coming from Hong Kong.
The latest economic numbers from Hong Kong indicate that the recession is over for China’s historically aggressive Special Administrative Zone (SAZ). Hong Kong’s gross domestic product rose a seasonally adjusted 3.3 percent in the second quarter from the previous three months, after plunging 4.3 percent in the first quarter, the zone’s government announced today.
Until now, Hong Kong had lagged behind mainland China, which has not shown negative GDP growth for decades. Hong Kong’s recovery faces challenges including a jobless rate still at a three- year high of 5.4 percent. As a global trading hub and international business center, Hong Kong also depends on improvement in the global economy to resume its booming ways.
Hong Kong’s recession lasted for about a year. It is a measure of the zone’s confidence that Chief Executive Donald Tsang is reported to be unwilling to announce new relief measures for the city-state in his October policy address, that according to the South China Morning Post Previously the government had allocated $11.3 billion for stimulus measures ranging from tax cuts to rent subsidies.
The rebound in the Hong Kong economy surprised many economists. In a survey by Bloomberg, the median estimate in a survey of seven economists was for a 1.2 percent gain in GDP for the second quarter. The latest numbers are more than double economists’ expectations.
China Stock Digest subscribers have a stake in the Hong Kong economy through an Index Fund, an ETF which aims to capture 85% of the total market capitalization of the Hong Kong equity market. Our gains on this fund have been marginal since we bought it less than a month ago. But the latest data should contribute to a bullish trend in the Hang Seng Index.
Hong Kong’s richest man, billionaire Li Ka-shing, says the worst is over for the global economy. Li’s companies, Cheung Kong and Hutchison Whampoa, recently posted better-than-estimated first-half earnings.
UBS predicts that Hong Kong home prices may rise 32 percent by the end of 2010 as a result of ample bank liquidity in the region and low interest rates. The Hang Seng Index is heavily weighted with property development companies and this rise may be reflected in our ETF.
Much of the future for Hong Kong depends on China. As an intermediary between mainland China and the world, Hong Kong relies partly on Chinese economic growth to fuel its economy. As we have reported, China’s GDP growth has exceeded expectations.
Hong Kong also relies partly on global economic recovery. Although some Pacific Basin nations, especially Singapore and Australia have emerged from recession, largely on the strength of China’s recovery, the outlook for western nations remains unclear.
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China Stock Digest
Shanghai’s key stock index dropped more than two percent today as investors took profits after a central bank announcement said it may fine-tune the macroeconomic policy. The benchmark Shanghai Composite Index tumbled 2.11 percent, or 72.17 points, to close at 3,365.33 points.
The Shanghai market is still up approximately 88% from last year’s lows. Corporate valuations are still relatively high compared to Hong Kong and New York. The mood of the market is somewhat nervous on rumors that the huge amounts of liquidity pumped into the economy are inflating the market.
New lending tripled to more than US$1 trillion in the first half of 2009 from a year earlier, fuelling concern that banks are taking on too much risk and bubbles are inflating in stocks and property.
Nothing would pop a Shanghai bubble faster than a sudden tightening of monetary policy by Beijing. The Shanghai market setback reflects investor concern and some profit-taking in the wake of statements from Beijing that have received differing interpretations in the investment community.
China’s central bank reaffirmed yesterday the “moderately loose” monetary policy that has driven a rebound in the nation’s economic growth and pumped up stock prices and property transactions.
But Beijing hedged its bets because of concerns about bubbles developing in the market and the larger economy. Policymakers will fine-tune the approach as needed, the People’s Bank of China (PBOC) said in a quarterly monetary policy report on its website. The nation will keep the yuan basically stable, it said. It will also use monetary tools to ensure reasonable loan growth.
Last month Premier Wen Jiabao pledged to maintain the ‘moderately loose’ policy, hoping to counter speculation that record new loans and surging asset prices will trigger a tightening of national monetary policy.
The Shenzhen Composite Index, which tracks the smaller domestic market, dropped 1.62 percent to close at 1,125.55 points. Clearly investors are in a mood to take profits because the central government has given mixed signals.
The way we see it, strict lending quotas and interest rate hikes are not in the cards for the time being. The government’s loose monetary policy will continue for the time being but it is on a short leash.
For the time being, Beijing will attempt to micro-manage asset and credit bubbles. Runaway real estate prices or stock market bubbles will likely trigger specific clampdowns rather than sudden tightening of monetary policy. The flood of money being poured into the economy is considered vital to continuing China’s GDP expansion.
A clampdown on new loans would cause a much more dramatic pullback in Shanghai and affect Chinese issues on markets around the world. But that is apparently not a problem on the horizon for the moment.
For the foreseeable future, Beijing’s lending and spending spree continues to support domestic growth as well as commodities prices around the world and exports from Asian trading partners.
China may not lead the world out of recession single handedly, but it’s definitely and important factor in global recovery.
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