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How China is still stronger than the rest of the world

China strong as a tower

By David Goodboy

Over the years, one thing has become abundantly clear: that is being a contrarian makes sense in the stock market. To be clear, I am not talking about going against my research. When I say contrarian, what I mean is going against the prevailing public/media sentiment. Often, when everyone is saying one thing, it’s time to take the opposite side.

For example, when everyone is overtly bullish, it’s time to look for compelling reasons to get short. The same thing can be said when the entire financial press has turned bearish, meaning it’s actually a superb time to search for reasonable long ideas. Along with offering a reliable supporting case for the contrarian view, the recent Presidential election made several additional market axioms clear.

First, things are not always as they seem. The media tends to exaggerate the harmful to obtain viewership. Second, it is critical to look behind the headlines and think for yourself when it comes to making investment decisions. This can be tough, but the rewards for bucking media bias and the consensus are often handsome.

Even the mighty George Soros has been carried away with biases and media hype. One particular error in judgment resulted in a billion dollar-plus loss when he shorted U.S. equities on the mistaken belief that a Trump victory would send the economy into a deep depression.

Right now, the stock market bears are having a field day with China. There have been waves of negative news sweeping the financial press. Everything from the Chinese stock market plunge early in 2016 to Trump’s protectionist policies has been mentioned to bolster the bearish case.

The media is using its anti-Trump bias and fear mongering nature to accelerate its bearish Chinese stock market story.

Well, I firmly think that it’s time to go long on China and my research backs up this belief. In an earlier article, I wrote extensively on the Chinese pension fund being ordered to purchase billions of dollars of Chinese equities by the government. But this is just the tip of the iceberg. The media is using its anti-Trump bias and fear mongering nature to accelerate its bearish Chinese stock market story. The following deconstructs the bearish Chinese bias and supports the bullish case.

How Donald Trump is going to play to China’s advantage

President Xi Jinping told Trump in their initial conversation that the two nations must coordinate efforts to promote global economic growth, while Trump promised “one of the strongest relationships.”

He is consistently lambasted in the media as a protectionist who will ruin trade with our partners and usher in a new era of expensive American-made-only products, but the truth is much different.

Despite Trump’s rhetoric, his real nature that of a businessman who will seek win-win deals with trade partners. The facts are already bearing this out.Bloomberg reported that President Xi Jinping told Trump in their initial conversation that the two nations must coordinate efforts to promote global economic growth, while Trump promised “one of the strongest relationships.”

Mark Mobius, executive chairman of Templeton Emerging Markets Group, is bullish on Chinese stocks, arguing Beijing officials may open the market more quickly.

I’d say we are more positive on China in a sense that Trump will help open the door up more. There’s a fear that Trump will institute protectionist policies but I don’t think that’s the case. Trump will be more business-like and realistic when negotiating with the Chinese.

Why worries about high debt are overrated

Bears often cite the 300% debt to GDP figure as a clear signal the Chinese economy is about to crash. What the bears are leaving out is that a significant portion of the Chinese debt is double-counted. Hedge fund manager Vladimir Yuzhakov of Shanghai-based Long Jing Capital explained it this way:

What is being missed is the debt is internal, provided by the government banks to the government businesses to fund infrastructure. In fact, this is the government’s direct investment in infrastructure, and to a lesser extent residential construction. But because of the Chinese economic structure’s idiosyncrasies, it was reflected as debt. It is as if a company’s cash register transfers money to same company’s construction department, but records it as if it were a loan. If consolidated at the government level, the debt figure becomes significantly lower.

How the Chinese economy is still growing

While economic growth has undoubtedly slowed, it remains among the fastest growing economies on earth. The media, hungry for readers, will write a headline like “China’s Economy has Slowed to a Decade-Low” when growth drops to 6.8% from 7.4%. Despite the headline being true, it certainly paints a more bearish picture than just stating the facts. It is entirely natural for economies to accelerate and slow over the years. In fact, it is almost impossible for economies to grow any other way.

China city

With strong and steady development from the last 30 years, China’s cities look no different from the west. | Image courtesy: Pixabay

Why you don’t need to avoid the Chinese stock market

Make no mistake, the Chinese stock market is well off its highs, but if anything this means it’s a great buy opportunity. Technical analysts will be the first to tell you that price does not lie. Taking a look at the iShares MSCI China ETF (Nasdaq: MCHI) it has bounced back from lows in the $42.00 per share zone at the end of December 2016 to the current level of around $47.00 per share. Price is above both the 50- and 200-day simple moving averages, signaling a strong buy opportunity.

Risks To Consider: Despite evidence to the contrary, a trade war could break out between the United States and China. Also, Chinese economic numbers are difficult to verify both on a positive and negative manner. Be prepared for volatility when investing in China.

Action To Take: I like the iShares MSCI China ETF as a way to get exposure to the Chinese stock market. Enter long on a break above $47.50 per share with a target of $60.00 per share and stops at $43.23 per share.


David S. Goodboy is managing director and founder of the Palm Beach Hedge Fund Association and Vice President of Marketing for intrendX.
This article was originally published in Econmatters
Featured image source: Pixabay
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