No Gravity In China’s Stock Markets

The Shanghai Composite, the best measure of China’s equities markets, traded at 1,700 last November, when it appeared that the GDP growth of the world’s most populous nation was moving well below 5%. The economy in China has been so overheated that 5% growth is a de facto recession.

Today, the index trades at 3,190, an extraordinary run for the benchmark of equity values in any country.

Many analysts look at China and see a stock market bubble. It has been fueled by the liquidity the government has pushed into the financial system through the nation’s $585 billion stimulus package. Once that money runs low, an artificially inflated economy and an overheated stock market will fall apart like cheap toys.

There is another way to look at the Shanghai Composite move and that is that China’s government has gotten the stimulus trick right while the American government has not. China has not worried about its long-term future or a major overhaul of the government and the structure of the economy. It has made the financial markets awash with cash believing that the moves will support consumer spending  and infrastructure building in the place of exports which are still falling.

China’s stimulus program, which, based on the rapidity of its deployment may only last a year, is a gamble that the recession in Japan and the West will begin to ease by the middle of next year. China’s exports will pick back up. GDP growth will again become a factor of factory production and demand for the country’s goods.

If China has got the timing right, the Shanghai Composite is cheap by most market measures. It traded above 5,800 in late 2007 and it may be on its way back.

Douglas A. McIntyre