If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Signs China Has Turned the Corner
08/05/2010 10:59 am EST
James Trippon, editor-in-chief of China Stock Digest, says the Chinese economy has recovered fully from the crisis and the recession, and he expects stocks to follow.
The Shanghai stock market has been one of the world’s worst performers for the year despite China’s booming economy. We have been looking for a number of signals that would turn China investors bullish.
First turning point: debt danger eases.
China’s big banks reported much better [nonperforming loan] ratios. The bad loan ratio at Chinese banks fell to 1.3% at the end of June, down from 1.58% at the start of this year.
Nobody expects Chinese banks will be immune to bad debts as massive government stimulus is withdrawn. But Moody’s says the likelihood of a downgrade in the ratings of Chinese banks is “slim.”
Second turning point: no sudden cutoff of stimulus.
China’s leaders pledged again to maintain a "modestly loose" monetary policy. That means no sharp slowdown in bank lending. Aggressive lending has worked like a hit of caffeine on the Chinese economy, and it will be hard for the Chinese government to completely withdraw monetary stimulus.
Third turning point: easing growth rate.
The fact that China’s economic growth eased slightly in the second quarter to 10.3% comes as a relief. The red-hot 11.9% growth rate during the first quarter was just too fast to be sustainable.
Fourth turning point: inflation appears to have peaked.
With inflation now at 2.9%, the danger of overheating is fading. When inflation was running at 3.3% (and rising), there was a real danger of a boost in Chinese interest rates to cool down the economy. [So,] the easing of inflation has cleared away another risk overhanging the stock market.
Fifth turning point: major brokers [turn bullish].
Reports are now starting to pour in from brokerages around the globe that Chinese stocks are poised for a bull run. Technical analysts at JP Morgan say there are signs that the bull cycle, which began back in 2008, [has] revived.
Sixth turning point: exports recover.
China's exports for June hit a record high since July 2008.China's shipment of exports last month grew by 43.9% from a year ago, while imports rose by 34.1%, which led to a $20 billion trade surplus, another record high.
Seventh turning point: Industrial output [growth signals] a rebound.
China's industrial output grew by 17.6% in the first half of this year. That is a remarkable 10.6 percentage points higher than [for] the same period last year!
We have in these watershed reports all the signs that China has resumed its economic boom in full. It is as if the global economic crisis had never happened.
Fears about China have been amplified by the relentless volatility of world stock markets. That means Chinese shares have been trading at a discount.
I am predicting that the turning point has been reached, and Chinese investments will seem increasingly attractive as investors realize that the economic world isn’t flat anymore. It is tilting toward China.
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