There is one thing everyone can agree on: China is cheap, at least the stock market is.
But it is 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 start in the worst assets and China certainly deserves it, despite a 14% rally in Shanghai this year. Bank of America's Michael Hartnett makes a few points today:
- financial conditions in China are easiest since June 20
- the Chinese trade surplus just reached a high ($957BN = 5¼% of GDP)
- China's share of global car production has increased from 1% to nearly 40% in the last 20 years (like Europe 34% to 13%, Japan 21% to 12%, the US 12% to 3% )
“Trump said he wants growth not inflation, and if consensus is too alarmist about Q1 prices, Chinese stocks are expected to do even better (entry point for international stocks in Q1).
Here's Bank of America's impressive record on Chinese car production. The short story? They have won just like in most other world industries. I know many people point to subsidies but they are far less than what is being visited and everyone subsidizing their car industry.
I wonder if at some point it is politically palatable in the west to campaign for access to $20,000 Chinese cars. Here's what Ford CEO Jim Farley said about his Xiaomi car:
“We went 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 sentiment on China, where shares fell again today?
Today, the PBOC promised to 'strongly expand domestic demand' along with support in the property market and better efforts in financial links with Europe and the US. That's going to be a tall order.
There was also a report in state-run Xinhua about increasing direct fiscal support for consumers and improving China's poor social safety net.
Unfortunately, the only details they pointed out were more subsidies for consumer goods trade, something they have been doing for a long time, and for industrial renewal. More vague promises were made of wage growth, better pensions, better medical insurance benefits and policies to encourage children.
Overall, I don't think this is enough yet but China will be a place to watch in the coming year.
