We know it’s a bit immodest to pat ourselves on the back for being ahead of the pack, but when the Wall Street Journal totally reverses itself to our way of thinking, we think someone has to mention it.
In the midst of the Chinese stock market rout last week, as the government instituted measures to stop the slide, the Wall Street Journal said, “The moves only heightened what is turning into an epidemic of anxiety among Chinese investors and a crisis of confidence in their leaders.”
“The more the government intervenes, the more scared I am,” Li Jun, who runs a fishing and restaurant business in the eastern city of Nanjing, told WSJ.
Then on Monday, after a three-day bounce, we open the Journal to read, “Many global investors are hanging on to China’s stock-market roller coaster. … While Chinese mom-and-pop investors have dumped shares en masse, big institutional investors based in the U.S. have been more sanguine. The reason: Even as China slows, its economic growth continues to outpace the rest of the world.”
Isn’t this what Asia Unhedged has been saying all along?
The Journal said “the recent selloff has also brought overall Chinese stock valuations down to what portfolio managers consider to be more reasonable levels. … Although many say it is still too early to go bargain hunting, fund managers are eyeing stocks that stand to benefit from the rise of China’s middle class and consumer spending.”
Didn’t Asia Unhedged say Hong Kong stocks were compelling buys?
The Shanghai Stock Exchange Composite Index rose 2.4% to 3,907 on Monday. It’s now up 13.2% from Wednesday’s bottom. The Shenzhen Stock Exchange Composite Index leapt 4.2% to 2120 and the small-cap barometer, the Chinext Price Index jumped 5.8% to 2,683.
Do we have your attention now?
We now expect the SHCOMP to recover into the 4,000-4,200 range this week given the government’s determination to save the market. Selling pressure on the Shanghai-Hong Kong Connect faded into last week’s close. With liquidity coming back to the market, once the SHCOMP crosses 4,000, net capital flows will turn positive again. On top of that, we expect China’s gross domestic product in the second quarter to come in at 7% again.
One of the US market’s oldest saws is “Don’t fight the Fed(eral Reserve Bank).” We want to apply this to China’s central bank: Don’t fight the People’s Bank of China. Even if the government has been unsophisticated and heavy handed in its handling of the market, the risk-reward of going against the nearly unlimited ammunition supplied by the PBOC to state funds is truly not worth the candle. This makes the ongoing bounce very real and durable. The conventional wisdom of selling into a bear market rally won’t pan out.