China’s Economy and Stock Market Leading Us Again… Downward

By: Graham_Summers

Much of the talk of economic recovery has hinged on China’s growth “miracle.” Indeed, while the rest of the world slipped into recession or worse, China has somehow managed to produce GDP growth of 8%, a staggering figure when you consider that roughly 40% of the Chinese economy hinges on exports… and the rest of the world is undergoing a massive state of deleveraging (and purchasing less).

I know, I know, the People’s Republic is shifting to a more “internal consumption” based economy. But with the average Chinese income hovering around $3K per year (roughly $8 per day not counting weekends), I’m not sure how the Chinese are going to start chugging Lattes and buying Tiffany’s jewelry in the next year or so.

Let’s step back and consider the facts pertaining to China today. China:

1. Is a Government-controlled country
2. Economic accounting oversight does not exist within this country
3. The Government has spent nearly $600 billion (almost 15% of GDP) in Stimulus
4. As a state-owned country, when the Government says “LEND!” the banks lend, big time. Consequently…
5. Most of the Stimulus has plowed into the real estate markets (new apartments in Shanghai and Beijing have risen 50-60% in value in the last year) and the equity markets (the Shanghai index rose almost 100% last year)

This final point is key in that China’s economic policy AND financial markets have lead their US counterparts ever since the all-time high in stocks in October 2007. Indeed, the Shanghai Index, began its plummet in November 2007 and pretty much fell for like a brick for 12 months.

In contrast, the US’s S&P 500 took its time meandering down, bumping along for most of 2008 before entering a free-fall in the Autumn months.

Thus we see China’s stock market leading the US on its way into the Financial Crisis of 2008. This leading status continued regarding economic policy response to the Crisis with the Chinese government announcing its Stimulus plan in November 2008 while the US announced its own plan in February 2009. As one would expect, this lead to China’s markets bottoming first (November 2008), while the US’s market didn’t find bottom until March 2009.

Thus we see China’s markets leading the US into and coming out of the Crisis. By now you’ve no doubt deduced that smart investors should keep their eyes on China for clues as to what might be coming down the pike for the US market.

With that in mind, I wanted to note that China’s Shanghai index  (black line) has been in decline since late December. In contrast the S&P 500 (red line) only began to follow suit in mid-January. And while US stocks have just begun to bounce from a rough couple of weeks, China’s market continues downward.

Of course, we must note that China’s decline is largely a result of its Government curtailing lending and easy credit in the People’s Republic (there has been no similar change in US policy, though it’s worth noting that the Fed’s various purchasing programs are due to expire in March if not renewed).

With this in mind, I would urge US investors to be extremely wary of this latest bounce. If China’s market continues to serve as a leading indicator, there is plenty of more trouble coming for US stocks.

If you haven’t already taken steps to prepare yourself for a rough 2010, take advantage of the current bounce in US stocks to do so. I can show you how.

Good Investing!

Graham Summers

http://gainspainscapital.com

PS. I’ve put together a FREE Special Report detailing THREE investments that will explode when stocks start to collapse again. I call it Financial Crisis “Round Two” Survival Kit. These investments will not only help to protect your portfolio from the coming carnage, they’ll can also show you enormous profits.

Swing by www.gainspainscapital.com/roundtwo.html to pick up a FREE copy today!

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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