China Enters a Bear Market - Preview for U.S. Stocks? 15 comments
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Equities worldwide are feeling the weight of another tough day for China’s Shanghai Composite Index, which slumped 6.7% today most since June 2008. Now, China’s equity market has dropped more than 20% from the latest highs, making this an official bear market.
The trouble started as the explosive growth of domestic lending has cooled significantly over the last few weeks. We had wondered, as recently as July in this blog (Leverage Bubble Reinflating, This Time in China), if the breakneck pace of bank lending was sustainable and if it was creating another leverage problem for the world economy. It is no surprise that the economy appeared to be booming as the state-run banks were dolling out loads of cash, but now that the lending has slowed, so too has the outlook for growth. New loan growth for August is reportedly going to be about half of what it was in July.
‘Bubble Territory’
The Shanghai Composite has slumped 23 percent to 2,667.75 since Aug. 4, more than the 20 percent drop that is the common definition of a bear market. China’s gauge is the worst performer this month among 89 benchmark indexes tracked by Bloomberg globally.
China’s economy isn’t “sustainable” and the Shanghai Composite “should be 2,000 or less,” former Morgan Stanley Asian economist Andy Xie said in a Bloomberg Television interview. He added that China’s market remains “in bubble territory.” — from Bloomberg.com
The bottom for the Chinese stock market was in late October of 2008, and from that point on indexes had just about doubled. The apparent strength in China’s economy was a major reason for the optimism that the U.S. economy had bottomed, as pundits like Jim Cramer talked about China leading the world economy out of recession. That thesis has held up thus far, and if that remains the case U.S. stocks could be headed for a correction. Of course, the two equity indexes don’t move in lockstep, but in general, Chinese stocks are a few months ahead of their American counterparts (a fair amount more volatile as well). The two economies are major trading partners and rely upon each other greatly, so to see them trade in similar fashion makes sense in our increasingly global economy.
The troubling trends in China should pressure energy and basic materials stocks most directly, but it may also have a broader impact on the psyche of U.S. investors. Right now, investors sentiment is firmly in bullish territory, but at Ockham, we have been expecting a correction for the last few weeks. There are no more major earnings reports until October to buoy the market, so macroeconomics should be the focus for investors. The developments in the Chinese stock market suggests that there is a risk of the China leading the market to the downside as well.
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This article has 15 comments:
Overall, it is the time of year when the innocence of summer is lost and we start the moves to finish the year looking good.
I suspect we will get some selling to keep the H1 gains and show a good 2009. 2010 is something else altogether.
I think that may have been a bit premature and presumptuous, believing that China could expand credit in H12009 at a 300% rate while maintaining acceptable underwriting standards.
Now China is reigning in explosive lending, fueling speculation that all is not well and the economy declared to have been miraculouly revived. With our own problems essentially unchanged except a bloated equities market, amputating the China locomotive thesis will be a serious blow.
It will cause us to start reexaming many different assumptions about our own economy and, in the course of doing so, will give us fresh perspectives on a deeply troubled economy. With the consumer accounting for 71% of the economy, there is no way to offset contraction in this sector. We will try, though, through government spending but the results will be disastrous; the world will not fund $10 trillion or more in deficits over the next ten years.
China, on the other hand, has an economy in which the consumer accounts for only 36% of GDP, leaving it the option to drive consumer spending through various fiscal policies. And because their balance sheet is better than ours, they have the wherewithal to pursue these policies which, if correctly designed, should be self liquidating as fund themselves over the long run through expanded state revenues and taxes.
In the short term both countries face severe challenges but in the long run China has a way out.
China would have to triple the size of its economy - and the US would have to stand still - if China were to pull even with the US in GDP.
Consider the following numbers, culled from official Chinese statistics:
1. About 65 million Chinese people live in households with more than $20,000 a year in income.
2. Around 165 million make between $2,000 and $20,000 a year.
3. About 400 million Chinese have household incomes between $1,000 and $2,000 a year.
4. About 670 million have household incomes of less than $1,000 a year.
As you see China is a land of extraordinary poverty.
And some dreamers to think that China can pull US and the world out of financial rut...
And Xie is right - Chinese market is indeed a ponzi scheme and gambling den where the "house" is CCP (Chinese Communist Party).
Some sober facts:
1. China is a communist country ruled by 1 party with iron grip. CCP party bosses appoint the national/regional/local politicians and many private company managements since many private companies are ex-SOE (state owned enterprises).
2. Corruption in China is prevalent, rampant and one of the worst even down to lower ranking employees. For example, factory canteen worker receives an "envelopes" in scheme where he claims he received 10 bags of rice when only 8 bags are delivered.
3. There is almost no "law" since laws are written to support the communist party or corrupt local communist bosses. Judges are appointed by the local communist boss and few if any understand law. Many judges got job thru "guanxi" or connection and of course bribes.
4. The Chinese banks in are BIG TROUBLE. E&Y got in heaps of trouble for discussing hidden bad and noncollectable debts. Local communist cadres dictate banks to lend to their pet projects and of course friends who bribe them not to mention COMPLETE lack of transparency.
5. No one except pea size brains trusts the communist government's statistics which are MANIPULATED.
6. Many of the listed companies numbers are COOKED. Auditors and their management can be bribed and extorted. It's beyond me how anyone would trust Chinese companies' financials unless audited by Big 4. And even Big 4s audited numbers are suspect since most Chinese companies carry multiple books including one for taxation and another with slush funds and hidden losses.
7. Latest Chinese share and commodity appreciation have lot to do with communists pumping money to the economy by directing the banks to lend. This kind of stimulus cannot go on.
Now is good time to buy FXP when all the investment gurus in unison are recommending Chinese stocks and even "taxi drivers" and clueless herd investors believe China with 1/3 US GDP will save the world.
About 165 million Chinese people live in what used to be the "second world."
The remaining 1.1 billion Chinese people live in a "Third World" country.
On Aug 31 04:42 PM doubleshortetf wrote:
> Some sober data on China for people fascinated with poverty stricken
> China (3rd world country ruled by 1 party AKA communist). Similar
> to the adoration US had for Japan 20 yrs ago right before the mother
> of all Japanese bear markets starting in 1989.
>
> China would have to triple the size of its economy - and the US would
> have to stand still - if China were to pull even with the US in GDP.
>
>
> Consider the following numbers, culled from official Chinese statistics:
>
>
> 1. About 65 million Chinese people live in households with more than
> $20,000 a year in income.
> 2. Around 165 million make between $2,000 and $20,000 a year.
> 3. About 400 million Chinese have household incomes between $1,000
> and $2,000 a year.
> 4. About 670 million have household incomes of less than $1,000 a
> year.
>
> As you see China is a land of extraordinary poverty.
>
> And some dreamers to think that China can pull US and the world out
> of financial rut...
www.theepochtimes.com/...
Here is cut and paste of "The Truth about China’s Stock Market". Best part is the last paragraph which state that China’s stock market is like gambling and China’s stock market is manipulated.
The Truth about China’s Stock Market
The truth about China’s stock market is actually not a secret, and most investors probably already knew it. That is, China’s stock market is a tool used by the government to re-distribute and re-organize social wealth on a grand scale, which means that it is a tool to clean out Chinese people’s savings accounts. The biggest winners in this process are, of course, government officials and their relatives who are the most well-informed about the actual value and re-organizing plans of those that control state wealth; as well as institutional investors who collaborate with them and who rely on insider tips to control the stock market. Those people have already made huge fortunes in the process. This is the truth about China’s stock market.
Actually, the goal of China’s stock market was not purely an economic one when it was originally established. When former Premier Zhu Rongji set up stock market in Shenzhen, he said that China’s stock market was meant to get money--to get money in the market and give it to companies that were unable to get money, and because these companies were unable to make money, they needed monetary support.
In Western countries, a fundamental criterion to allow a company to be listed is that the company must have performed well for at least three years while meeting other standards. The company must obtain approval from the Securities Regulatory Commission prior to issuing stock. Under supervision, the issued stock can also be pulled from the market to ensure and safeguard in particular small and medium sized investors.
China’s stock market has been established to operate like an ATM for the listed companies. For the majority of the listed companies, economic reform is nothing but a mechanism to trap money. Many heavily indebted State-owned companies have been listed in the stock market after re-packaging. All of a sudden, they become the new stars in the market with easy loans and finance. The foundation of a stock market is the listed companies. With a weak foundation, how can any high stock price be affordable? The deflation in stock prices is therefore predictable.
Other than the fact that the listed companies would benefit from the weak structure in the Chinese stock market, the true “beneficiary” of this contrived structure is the “interest group” who would profit from the initial establishment of a listed company and the trading thereafter. As for the investors, China’s stock market serves to mentally “entertain and exercise” them. It gets investors far more emotionally involved than any intellectual game could hope to.
In an interview after the market dived for several days prior to the Olympics, economist Tang Min points out that, “No economists can make sense of China’s stock market.”
“I’d advise the investors to give up the illusion that the government would restore the stock market or that the market will rebound. Escape China’s stock market while you can. If you insist on trying to profit from it, go ahead. However, do not complain if you are drained empty.”
Some say that entering China’s stock market is like gambling. That would be over-estimating the capacity of the Chinese stock market. Gambling relies on luck, and sometimes strategies—it still has fairness in it. However, China’s stock market is a manipulated and systematic black market. The majority of Chinese investors seem to have gradually recognized this. This could suggest that the end of this massive robbery is near.
It's amazing to me how when we look past our own noses we see things in a critical way. There is no doubt that corruption and manipulation exists in densely populated developing countries.
What's the Western excuse for not seeing what's under our own noses and why do we prefer not to see it and ignore it completely?
On Aug 31 03:48 PM CautiousInvestor wrote:
> that China could expand credit in H12009 at a 300% rate while maintaining
> acceptable underwriting standards.
>
> Now China is reigning in explosive lending, fueling speculation that
> all is not well and the economy declared to have been miraculouly
> revived. With our own problems essentially unchanged except a bloated
> equities market, amputating the China locomotive thesis will be a
> serious blow.
>
> It will cause us to start reexaming many different assumptions about
> our own economy and, in the course of doing so, will give us fresh
> perspectives on a deeply troubled economy. With the consumer accounting
> for 71% of the economy, there is no way to offset contraction in
> this sector. We will try, though, through government spending but
> the results will be disastrous; the world will not fund $10 trillion
> or more in deficits over the next ten years.
>
> China, on the other hand, has an economy in which the consumer accounts
> for only 36% of GDP, leaving it the option to drive consumer spending
> through various fiscal policies. And because their balance sheet
> is better than ours, they have the wherewithal to pursue these policies
> which, if correctly designed, should be self liquidating as fund
> themselves over the long run through expanded state revenues and
> taxes.
>
> In the short term both countries face severe challenges but in the
> long run China has a way out.
>
>
>
>