China's Rally: No Flash in the Pan

03/25/2009 11:26 am EST

Focus: GLOBAL

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says China’s market has set the pace this year, and he thinks wise government policy should keep the ball rolling.

After two weeks of speeches and debates, China’s National People's Congress (NPC) [set some goals for] how the country plans to recover from the [global financial and economic] crisis.

Here are some of Beijing's key socioeconomic policies and objectives for 2009: 

  • Achieve 8% GDP growth
  • Increase broad-based money supply (M2) by 17%
  • Increase spending on the social safety net by 18%
  • Develop a secondary market for used cars and homes
  • Target 4% CPI inflation rate
  • Keep the urban unemployment rate below 4.6%
  • Increase infrastructure spending significantly
  • Increase education spending

While I was pleased with the outcome of the NPC's annual meeting, some people were disappointed that the Chinese government didn't announce a new stimulus package or an addition to the current stimulus package.

What people don't understand is that it is more important for Beijing to be committed to combating the financial crisis than adding another big headline number for additional economic stimulus. And that's exactly what China's policymakers are focusing on.

These policies will continue to pump more money into the Chinese economy and liquefy the Shanghai stock market—which is already taking place. That is why Morgan Stanley China A-Share Fund (NYSE: CAF) is up more than 20% for the year and making a new five-month high even as most global stock markets are down between 15% and 25%.

Shanghai is outperforming all the other stock markets around the world, even Chinese stocks trading overseas, [because] Chinese banks are pumping money into the local economy. Liquidity and earnings are the most important drivers of stock price movements, and right now China is one of the few countries in the world that are liquid.

Because the Shanghai stock market is largely closed to foreign individual investors, the best way for US based investors to participate in the Shanghai rally is still through CAF. The Chinese banking system is the most liquid in the world right now, as Beijing has the ability to deploy its huge $2-trillion reserves to boost the Chinese economy.

Chinese banks are not bogged down by toxic assets or over-leverage, so it is pumping money into the system—some of which is spilling into the Shanghai stock market. Eventually this will boost Chinese stock earnings and valuations as well for all Chinese companies across the board. This is the big fundamental reason why I have been so bullish on China.

I see more room for CAF to run up as the Chinese government injects more funds into the economy. Continue to buy CAF under $30. (It closed Tuesday above $29—Editor.)

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