Overheard: Two Views of China

• Posted by DynamicHedge
• on November 30th, 2012

This conversation is happening:

Have you seen a chart of the Shanghai Composite $SSEC lately?  It looks terrible.  Not only has it broken support at 2000, but it’s back at levels not seen since January 2008.  There is no bottom.  I told you China was a complete write-off.  Down over 15% and crashing.

Have you looked at a chart of the Hang Seng Index lately?  It looks amazing!  Not only did it hold up well in the pullback, it’s back at 52-week highs!  The Asian growth story is still in tact.  Global growth is back baby!  Up over 20% and ripping!

So who’s right?  Unfortunately for us, China is not the easiest economy to understand.  Equity markets are usually a good barometer of how healthy an economy is, but mainland Chinese stock markets are an absolute joke (no short sales, holding restrictions, etc.) and will take years become efficient price discovery mechanisms.  The mature market of Hong Kong is a close proxy because many Chinese companies are dual-listed, but doesn’t represent a pure look at mainland Chinese sentiment.

Losing the 2000 level on the $SSEC is big.  The negative market sentiment in China certainly worth noting, but I would classify it as evidence rather than definitive proof we’re heading into a new bear for US markets.  The most successful people in China have always taken their cue from policymakers, not markets.  I’m interested to see what the next step is for the leaders of China.

 

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