By far the most important occurrence Wednesday took place in the Chinese market, which rallied nearly 3%. The reasons for the rally are multiple: First, and most importantly, the government is now focused on promoting urbanization and increasing domestic demand. Secondary factors for the rally include the government continuing to encourage consolidation in industries with overcapacity, HSBC finished selling its stake in Ping An, which has acted as an overhang, general optimism from economic data, and chatter that the government intervened in the stock market (probably true).
The main takeaways are twofold: First, the Shanghai Composite has been one of the worst-performing markets in the world this year, and it looks as though the market there reached some sort of selling capitulation over the past few days. Signs of capitulation from local Chinese equity investors have emerged and the declines of the last week look like capitulation, especially in the face of the improving Chinese economy.
Second, the government’s focus on expanding domestic demand can’t be understated. Up to this point, the Chinese economy has been export-driven—meaning they make the stuff we buy. But, as the middle class has grown, it’s widely anticipated that the next phase of evolution in the Chinese economy will be growth in imports. To keep things simple, farmers who moved into the cities 5-10 years ago now have money, and they want to eat out and buy nice stuff, just like we do. Balancing the Chinese economy between industrial production and domestic demand is an important next step, and with the government focusing on fostering that growth, that bodes well for international consumer brands.
The overarching point here is that if China’s growth is starting to accelerate again, then it’s a big tailwind for the global economy (and especially Europe) and that isn’t being reflected in markets because of 1) fiscal cliff concerns and 2) Europe hangover. So, there is potentially an opportunity there. I consider FXI the best way to get China exposure because I prefer to own Chinese stocks listed in Hong Kong as opposed to Shanghai (the Shanghai market is a much more immature market and mainland Chinese equity investors have almost made no money there over the years, so it is susceptible to much more short-term liquidity noise than shares in Hong Kong).
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