Everybody seems to agree that things are looking up for the Chinese economy.
The real disagreement is about how long this improvement might last and whether there’s any chance that the upturn might go from improvement to boom.
Here’s some of the data that points to an improvement. The Purchasing Managers Index for the manufacturing sector climbed to 50.5 in March from 49.2 in February. That was the biggest improvement since 2012 and it moved the index back above 50 and therefore into expansion territory. The International Monetary Fund, in the midst of cutting its global growth forecasts, actually raise its projection for growth in China’s economy for 2019 to 6.3% from 6.2%. That’s not much of a bump but the trend is important, especially in the context of a generally slowing global economy. The Shanghai and Shenzhen stock markets, often forward indicators for either real or imaginary improvements in the economy are up more than 30% in 2019.
It supports belief in that data and those trends that the explanations for the improvement are so straightforward. The Chinese government and the People’s Bank have moved to simulate the economy. The government has increased fiscal spending. The People’s Bank has cut bank reserve requirement ratios five times in the last year and a third. The government has reduced both value-added and personal income taxes. Earnings growth looks likely to accelerate in the second quarter. And, of course, there’s always the possibility that current U.S.-China trade talks will bear fruit.
None of this, however, really changes the slow growth facts about the global economy–a really crucial fact-of-life for an export-oriented economy such as China. It doesn’t change the fact that rising oil prices act as a brake on economic growth. And it doesn’t change the fact that there is no guarantee that the United States and China will end their trade war even if the two countries do sign an agreement in the relatively near future.And none of these short-term measures fixes any of the core problems with the Chinese economy. In fact some of the near-term moves are likely to make those long-term problems more difficult to address. The central bank’s policies to encourage bank lending are certain to lead to exactly those speculative excesses in the non-bank lending sectors that the People’s Bank has been trying so hard to contain.
From my experience observing China’s stock markets these very real long-term problems won’t stand in the way of a continuation of the current short-term boomlet in the stock market. The liquidity to keep prices rising is there and most of the time that’s all it takes to keep a boomlet booming.I can see some evidence that traders are getting a little more cautious in picking the ponies that they want to ride. For example, in the last three weeks I’ve read multiple recommendations to buy shares of liquor producer Kweichow Moutai,. Now given that the stock has hit an all time record repeatedly, this may not seem a particular cautious pick. But this is a real company with an amazing profit margin–and it’s not in the ultra speculative real estate or infrastructure sectors. In the Chinese context, where companies with no profits and in protracted flirtations with bankruptcy, can soar to the moon, then, yes, recommending Kweichow Moutai is a sign of caution.
Unfortunately, Kweichow Moutai only trades on the Shanghai exchange so that stock isn’t much help for those of us who would like to participate in the near-term China boomlet, but don’t want to throw all caution to the wind. Not so long ago on my JubakAm.com and JugglingWithKnives.com subscription sites I recommended e-commerce and logistics play JD.com as a leveraged play on the Chinese economy and speculation that U.S.-China trade conditions would improve. I’d still recommend the stock here, but I would note that it is up 27.52% since I recommended it on January 22, 2019 in my Volatility Portfolio. I’m working on a couple of other China boomlet ideas and I’ll post them this week.t
