Confused enough yet? Bad news on China's economy is good for China's stocks today

02/22/2012 3:27 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The relationship between macroeconomic trends and stock prices is especially tortured right now.

Not only do investors have to figure out which way global economies are moving, but they need to figure out if stock prices will rise or fall on good and bad news.

Take today’s reading from HSBC’s Flash Manufacturing Purchasing Managers Index. The index showed a slight tick up to 49.7 to hit a three month high, but the export component in the index fell to an eight-month low. (It’s called the “flash” report because this survey appears before the official purchasing managers index. Based on a survey that includes fewer of the country’s big state-owned enterprises, the flash survey tends to be slightly more pessimistic than the official index.)

Good or bad news for Chinese stocks?

Bad since anything below 50 on the index indicates that the economy is contracting. And the reading today, especially the continued drop in the export component, did raise some worries that the economy might be slowing too quickly.

But bad may be good since Chinese investors think that economic weakness—as long as its not too weak—will lead the People’s Bank of China to expand the money supply with more reductions to the bank reserve ratio–like that announced on Saturday—and an eventual cut in interest rates.

The reaction? A combination of a sub-50 index reading and new rules that relax restrictions on second-home purchases sent China’s markets higher today. In Hong Kong the Hang Seng closed up 0.3% and in Shanghai the Shanghai Composite finished up 0.9%.

Moreover, the stocks that led the market up were the extremely interest rate sensitive shares of property developers. For example, in Hong Kong shares of Evergrande Real Estate Group (3333.HK), China’s third-largest property developer, climbed 5.14%.

Of course, we’re still dealing with January economic numbers here, which are distorted by the move in 2012 of the Lunar New Year holiday to January from February in 2011. That has shifted economic activity from one month to the other and makes comparisons and trends really hard to interpret.

As if the job wasn’t tough enough for investors already.

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