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Worst to First. Shanghai Leads Asian Markets to Profits

You'll never believe what suddenly boosted the Shanghai Stock Market out of the cellar to first place in Asia. Just yesterday, the Shanghai Composite Index gained almost 54 points, or 1.8 percent, to reach 2,996. That is the highest point the index has seen since November 15th of last year.

The Shanghai Index has now surged a solid 12 percent from year's low which it set on January 25th.

It really is hard to believe that the recent lowering of Chinese growth targets has helped lead Shanghai to the top spot among Asian stock markets. But that is a key part of what has happened, starting with a long-winded speech last weekend.

In his talk, Premier Wen Jiabao laid out a sweeping five-year vision for China in his state-of-the-nation report. The occasion was the opening session of the National People's Congress. Yes, there were grand plans, but there was also more restraint.

Chinese growth targets are all in the single digits now. As I reported to you earlier, China's five-year growth plan calls for an average of seven percent GDP growth per year. (Last year China's GDP expanded at a world-beating 10.3 percent.)

For this year, Premier Wen set a target of eight percent growth. Why did markets welcome the news? Partly because Wen coupled his message of restraint with a stern anti-inflation lecture. He declared that the government will "decisively" curb increases in prices that may threaten "social stability".

Chinese stock markets registered solid approval of Beijing's fight against inflation and its newest frontiers for growth, as outlined by Wen. Shanghai's benchmark CSI 300 Index jumped two percent. And the Shanghai Composite Index which slumped fourteen percent last year, has rebounded by almost seven percent this year.

Shanghai Composite Index, Year to Date

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It's clear that Chinese stock markets have gotten over the jitters they suffered last year when Beijing first tightened the screws on lending by raising interest rates and bank reserve ratios. Wen's new "Five-Year Plan" appears to be inspiring confidence that China is setting a sustainable path for the future.

Do Plans Matter?

Plans and promises by politicians mean little in the U.S. Presidential declarations rarely lift markets although sometimes a careless word from Washington can spook investors badly.

In China the word from on high has much more meaning. Say what you will about a single party state; a command made within a command economy carries real weight.

In this case there were many commands. The elderly Premier spoke for two solid hours to the great hall. Long ago the People's Congress delegates in the vast chamber were just humble party members. Now the auditorium is packed with millionaires and billionaires, all looking out for the next big thing.

I won't bore you with all of the details, but here are some highlights worth noting:

  • China will build a total of 36 million affordable houses over the next five years. That is not a typo. The goal really is 36 million new homes.

  • China is going full speed ahead with the expansion of its high-speed rail network, targeting 16,000 kilometers of lines by 2020.

  • Good news for the west: Beijing wants to "stabilize exports, grow imports, and shrink the trade surplus".

  • Green energy takes a priority as China plans to generate 235 million kilowatts of power from new clean energy sources in the next five years. Solar and wind power will lead the way in the next five years.

  • Over the longer term, nuclear power will take a much more important role. Increasing energy efficiency per unit of GDP will be a long-term theme.

  • Most importantly: there could be pay increases all around.

China is apparently putting real money behind its words. We have heard for some time now that China intends to increase domestic consumption, a goal dear to the hearts of governments and corporations around the world. Now we have a tangible target.

Wen says he wants seven percent annual growth of urban incomes, and a somewhat lower target for rural areas. If he can achieve that goal, he will pump immense spending power into the economy.

Although Chinese markets reacted quickly, western stock markets were distracted by other concerns:

Shanghai Composite Index (Yellow) vs. China ADR Index (Green)

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As you can see, the Shanghai Composite Index lagged behind the China ADR index for much of this year. But now the trend has reversed. Chinese stocks have shown a very sharp uptick following the new plans from Beijing.

Can U.S. traded ADRs be far behind? I suspect not.

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