Chinese Stocks Gearing Up For Strong Second Half?
This past Friday Chinese stocks posted their biggest one-day gain in over a month. The Shanghai Composite Index jumped nearly 27 points to close at 2,871 for a gain of 1%.
The index also notched its first weekly advance in four weeks, rising 0.3%.
Chinese stocks rallied on news showing recent interest rate hikes and increases to bank reserve requirements are starting to work. A number of important economic indicators showed last week China’s red hot economy is finally slowing down.
This was music to investors’ ears.
Prior to last week, Chinese stocks had been in freefall. The Shanghai Index had dropped more than 6% after setting a five-month high on April 18th.
Investors were selling Chinese stocks across the board.
They were concerned about the Chinese economy not slowing down despite government efforts to reign in surging economic growth. They feared China’s economy was overheating and giving rise to potentially out of control inflation.
Under that scary scenario, interest rates would have to keep rising with no end in sight.
The prospect of rising interest rates for months to come had many worried China was entering a prolonged period of much slower growth. And some investors were even talking about rising interest rates sending China into an economic recession.
But new economic data show those fears were overblown.
First off, consumer inflation eased slightly in April to 5.3%. That’s down from a 32-month high in March of 5.4%. Not a huge drop, but it was better than expected. And the change in direction is a strong signal inflation may have peaked.
In addition, new data show economic growth is finally slowing. April’s 13.4% increase in industrial output was a full percentage point below expectations and the strong pace in March. Further evidence China’s rate hikes and higher bank reserve requirements are having the desired slowing effect.
Finally, new data show Chinese consumers are also starting to reign in rampant spending. Retail sales grew at a slower rate than expected in April. And the rate of consumer spending growth declined slightly from March.
Taken together, these indicators paint a much different picture than what we’ve been seeing over the past few quarters. They show the Chinese economy starting to slow down from the previous breakneck pace.
Why is slowing economic growth a good thing for China?
It means the Chinese government may end their interest rate tightening policy much earlier than previously thought. It also means they may not have to raise bank reserve requirements any further.
As a result, many Chinese stock market analysts are now humming a much happier tune.
Jim O’Neill, Chairman of Goldman Sachs Asset Management, says China’s inflation “won’t be a problem” in the second half of 2011. And he followed up that bombshell by saying Chinese stocks may have a “big rally” as the rate hike cycle ends.
O’Neill’s comments echo what I’ve been saying for months. Back in February 2011, I wrote an article entitled Big Bargains In Chinese Stocks. Here’s what I said then:
I think it’s much more likely the government’s policy of measured interest rate increases will bring China’s high flying economy down for a soft landing. In other words, I’m expecting a combination of strong growth and manageable inflation in the second half of 2011.
My view of China’s economy has not changed one bit. In fact, I feel even more strongly China is headed for a soft landing. And I’m convinced Chinese stocks are setting up for a huge rally in the second half of this year.
This is one rally you don’t want to miss.
The easiest way to play the coming rally in Chinese stocks is with an exchange traded fund (ETF). The best of the bunch is the iShares FTSE China 25 Index (FXI). This ETF has plenty of liquidity with net assets of $8.2 billion and average daily volume of 15.9 million shares.
Take advantage of the ongoing negative sentiment for Chinese stocks. You have a golden opportunity to establish a position now at cheap prices. By getting in ahead of the crowd, you’ll be perfectly set up to rake in huge profits when Chinese stocks surge later this year.
Category: Foreign Markets
