China – The Ox is strong

Hang Seng (15.670)  Shanghai B (168,00)  USD/CNY (6,8320)

For the next 12 months we won’t see the lows from last autumn and I need to revise my thinking about Chinese stocks.

I have always argued that the turnaround should come in China and other countries in that area. But I admit that I didn’t expect the turnaround to happen so fast and I will claim that it is not sustainable. The counter reaction might come next year.

No doubt that domestic China has seen some improvement. The number of passengers on domestic Chinese flights lately have shown y/y growth rates of more than 10%. Different consumer segments also have shown good signs. But in reality are we talking about small indications.

The rest for sure is partly influenced by the government. The government officials talk the market up. The car sales numbers are helped by government buying of new cars that should have been bought later in the year. Rumours that the slightly positive housing market sales partly is caused by state run banks that are forced to increase their lending (fake mortgages might be in the game…..).

The Q1 GDP numbers that will be released Thursday are long awaited. The expectations have been around +6,3% within a range of 6% – 6,8%. Based on comments Wednesday the number will be around 6,0% in the very low end of expectations. The market will look at the q/q development and I think it could give a positive impulse to the stock market Thursday. What is very important to note, is that whatever the number will be, then it is inflated – it should have been lower……The government have done everything to keep the growth running. State owned companies have been persuaded not to fire people, companies are importing raw materials with the sincere hope they will be used later etc.

If the Communist Party finds it necessary with an additional stimulus package, I take it as a clear sign that the situation is worse than expected. It seems likely that the package is under way.

Earlier this week Financial Times had a very interesting article about the Chinese housing market. Mr. Cao Jianhai, professor at a leading government think tank, argued that property prices will drop another 50% during the next 2 years.

All these alarming signals are not having any impact on the market right now, but fit well into the W shape recovery.

While I consider the strategy about Chinese stocks I remove the targets.

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