Dear Reader,

China is covered every week but after the official announcement about the stimulus package over the weekend I found China a natural Hot Topic.

Please share your view on my comments her below.

China – turning into a US alike economy.

Hang Seng (14.745)  Shanghai B (100)  USD/CNY (6,8255)

The Chinese stimulus package certainly is good news, particularly on mid- to long term horizon. The frequent reader of the China comments will find similar components in the stimulus package and the solutions discussed in the weekly comments. I can only agree in what the Chinese government is doing.

The nearly $600 billion package represents 14-15% of GDP over the next 2 years which is significant. Only some headlines about where the money will be allocated have been disclosed. Very wisely they invest even more than planed in infrastructure in rural areas. Apart from boosting the economy the government also makes it possible to move or establish new factories in these areas where salaries are lower.

It is still uncertain if the stimulus package is new spending or it includes the public spending that already was planed, this is important information that still is missing. Secondly is a precondition for success that the spending isn’t counterweighted by higher taxes, and the government must borrow the money, not finance the spending by selling assets like real estate.

Very fair that Chinese stocks went up on the news, particular within the sectors that benefit directly. The same about Japanese companies in these sectors, because they tend to be very well positioned in China. Some of the global players in infrastructure are happy as well.

That Chinese B shares rises more than the A shares for domestic investors could be an indication that investors globally already are over shooting on the news. Another reason is that I have a feeling about some being short Chinese stocks (fundamentally very wrong).

As so many things here in life there is a flip side of the coin. I heard some comments this morning where some speculate that China is worried about the global economy.

They are worried if the global problems hurt domestic China. I can only repeat that the Communist Party is deeply worried about the domestic economy and it’s where the attention is.

The talk about a stimulus package was already circulating last week, where a number of $732 billion was mentioned. The comments made by an official also said that China seems to be in an “excessive economic slowdown”.

Other reports tell stories about all the rural migrants in the large cities who aren’t legally registered. It might sound like a minor problem, but estimates say that it’s 130 million people we are talking about (yes, 130m).

Very suddenly the demand for their labour force has dropped and they are now trying come back to the rural areas where they come from, to even lower salaries, if any.

These numbers and the problems are not unknown to the Communist Party. The migrants now can build roads, railways etc. in the areas where they origin from.

It all gives a more balanced picture, meaning the spending plan will compensate for some missing incomes elsewhere. But as mentioned in the start, it will boost some sectors and is overall positive.

The most positive effect is mid- to long term, as the Communist Party turns the Chinese economy to be domestic US alike demand driven.

The Chinese stock market still is very speculative and not like the Western markets, but there is good a chance that China will become the global growth engine. It’s why I spend so much time on China J

As usual I believe the first market to reverse is China mainland, Hong Kong, partly Japan, India and some other Far Eastern markets. The only reason why I still don’t recommend to buy China and Hong Kong is the bearish global outlook. Though, the latest initiative from the Chinese Communist Party makes it even more important to watch China.    

We might have seen the lows in Hang Seng and Shanghai B, but I keep the targets due to the global outlook.

Targets: Hang Seng 11.000     Shanghai B 90

Best regards

Peter

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