There is one thing that everyone can agree on: China is cheap, at least the stock market is.
But it's cheap for a reason, economic growth is struggling and the market has lost faith in Beijing to offer the kind of stimulus that made it an economic miracle.
That said, the biggest rallies often begin in the most-hated assets and China certainly qualifies, despite a 14% rally in Shanghai this year. Bank of America's Michael Hartnett makes a few points today:
- financial conditions in China are the easiest since Jun'20
- the Chinese trade surplus just hit record high ($957BN = 5¼% of GDP)
- China's share of global car production has soared from 1% to almost 40% past 20 years (as Europe 34% to 13%, Japan 21% to 12%, US 12% to 3%)
"Trump said he wants growth not inflation, and if consensus is too fearful of Q1 tariffs, China stocks are set to outperform even more (entry point for International stocks in Q1).
Here is an impressive Bank of America chart on Chinese auto production. The short story? They've won just like in most other global manufacturing. I know lots of people point to subsidies but they're far smaller than what's touted and everyone subsidies their auto industry.
I wonder if at some point it's politically palatable in the west to campaign on access to $20,000 Chinese cars. This is what Ford CEO Jim Farley said about his Xiaomi car:
"We flew one from Shanghai to Chicago, and I've been driving it for six months now ... And I don't want to give it up."
So what could change the mood on China, where shares fell again today?
Today, the PBOC pledged to 'forcefully expand domestic demand' along with support in the property market and improved efforts in financial ties to Europe and the US. That's going to be a tall order.
There was also a report in state-run Xinhua about stepping up direct fiscal support to consumers and improving China's poor social safety net.
Unfortunately, the only specifics they highlighted were more subsidies for consumer goods trade-ins, something they've been doing for awhile, and for industrial upgrades. More vague pledges were made on wage growth, better pensions, better medical insurance benefits and policies to spur childbearing.
Overall, I still don't think this is enough but China will be a spot to watch in the year ahead.
This article was written by Adam Button at
www.forexlive.com.
