The Shanghai Composite Index stock market, though still down some 11% on the year, is up more than 21% from its late-February lows.
As we have frequently noted, the Chinese stock market is driven by retail investor sentiment and activity -- it is a wholly different creature from the stock markets of developed countries with deep and complex financial systems. Chinese cities, including Shanghai, are taking steps to cool their housing market, and that will drive retail investors’ funds into stocks. Also behind the rally is the prospect of ramped up infrastructure spending and improving economic fundamentals in the People’s Republic. With “fiscal stimulus” now a nearly global watch-word, it is beginning to sound like a growth and demand shock may be on the horizon: higher growth, higher inflation, and higher interest rates. Such a pickup in global demand will be a boon for China.
Investment implications: With Chinese cities rolling out efforts to curb their overheated housing markets, retail Chinese investors are turning to stocks, and have driven the Shanghai Composite index into bull-market territory, up more than 20% from its February lows, although still down some 11% on the year. This retail participation is what we look for, since in the absence of deeply developed capital markets, such enthusiasm is what drives Chinese stocks, as we have noted before. With “fiscal stimulus” on the lips of leaders around the world, we could be on the cusp of a demand and growth inflection -- which would bode well for the Chinese economy as it continues to show signs of stabilization.
