By Ron DeLegge
China is often portrayed as kind of economic savior to the world. But are its prospects really that bullish for itself and elsewhere?
China's economic growth plans for 2014 were laid out by the country's top policy leaders at the just completed Central Economic Work Conference. And despite very real signs of a financial slowdown, China is likely to keep its growth rate stubbornly fixed at 7.5% for next year.
A less accommodative monetary stance by China's leaders is problematic for "risk on" assets, like equities.
The PBOC is focused on belt tightening of China's credit markets, particularly on excessive leverage in the interbank marketplace. Last month, the yield on China's 10-year bonds surged the most since 2007 to around 4.72%.
OCBC Viewpoint observes, "The tight bias may remain going into 2014 given China's money supply growth M2 remains high at 14.2% at November, well above government's target of 13% which was set in the beginning of the year."
As always, market prices always trump GDP forecasts and other tertiary data.
Rather than being a "Knight in Shining Armor," Chinese stocks have been clear underperformers relative to the rest of emerging markets (NYSEARCA:VWO) and developed markets (NYSEARCA:VEA). Over the past five years, the iShares China Large Cap ETF (NYSEARCA:FXI) has risen just 23.47% compared to a more than 60% jump for broadly diversified equity emerging market ETFs like VWO.
Although Chinese stocks (NYSEARCA:GXC) have rebounded from their summer lows, more recently, they're showing signs of continued weakness and have dropped around 3.3% over the past month.
In our Weekly ETF Pick from 12/4 we wrote:
"While we respect the rally Chinese and all emerging market stocks have enjoyed, we're nonetheless suspicious about the sustainability of the run. Aside from huge systematic risks, the Federal Reserve's eventual scale back of QE is a threat to rising asset prices. The ProShares UltraShort FTSE China 25 ETF (NYSEARCA:FXP) aims for double daily opposite performance to a basket of large cap Chinese stocks and we're buying FXP at $14.65."
Since our 12/4 trade alert, FXP has risen around 6%, our stop losses have been increased to protect profits, and if the sell-off in Chinese stocks builds momentum, more gains are ahead for patient bears.