Chinese Stocks Break Out

Many have noted the disconnect between the restrained strength of the recovery of the U.S. economy from recession and the elevation to near record levels of the U.S. stock markets.  A sort of equal and opposite event may have been occurring in China.  Chinese stocks have broken out of a severe downtrend:  See LINK to interactive chart.  Click on 5Y on the top right to see the scale of the collapse.  Of course, there had been quite a boom preceding it, as this chart from Alsosprachanalyst blog shows:


The blogger wrote in the same post written on December 4 titled On the (absurdly) weak Chinese stock market (LINK):

 Hong Kong/China investors have certainly learned in a hard way in the past two years that the rate of economic growth may have very little to do with stock market return. However, we, as everyone else, are amazed by the weakness of Chinese stock market. It was as if even bears were not bearish enough.

While we are very notably pessimistic on both Chinese economy and its stock market in the longer timeframe, we are at the same time constantly surprised the the failure of Chinese stock market to produce any respectable bounce. This comes as an even bigger surprise for optimists as everyone seems to be convinced (much more convinced than we are, obviously) that the Chinese economy has somehow bottomed, with incoming data improving. Shanghai Composite simply does not care, while the H-share counterparts are doing significantly better in the recent months, but still underperforming the developed market for the past 2 years or so.

This may have marked a meaningful, even if intermediate bottom.  The above-linked Shanghai Composite Index in fact made its bottom on December 3 and closed today, Dec. 14, at 2151.  Its one-year high was near 2440 at its high in late 2010 was around 3200.  Even though China is similar to Japan in that it is a relatively resource-poor country with a rapidly-aging population, and thus might catch the “Japanese disease”, 4% up-moves such as Chinese indices exhibited overnight off a bottom so severe that even a bearish analyst is floored by the extent of the price declines often are a harbinger of a strong vertical move upwards.

There is enthusiasm over a middling good monthly  flash PMI survey (LINK) which showed: 

 Flash China Manufacturing PMI™ at 50.9 (50.5 in November). Fourteen-month high. 

Flash China Manufacturing Output Index at 50.5 (51.3 in November). Two-month low. 

What may simply be happening is that the massive collapse from a bubble peak in stock prices in 2008 is now perceived to be overdone.  As of now, China is not following the eurozone into recession, at least if the various surveys of China’s economy are to be believed.  The incoming regime is also believed to be focused on getting the economy moving again.  Inflation data out of China has been low lately.  
If Chinese stocks continue to rally, it will be interesting to see if the U.S. stock market continues to decouple and does not rally, or if a global stock market rally is underway.
U.S. industrial production data for November are due out soon.  Whether rebuilding/relief efforts after Hurricane Sandy will improve some of the data, and whether ongoing loss of production due to the same will make this preliminary report more difficult to interpret than usual is unclear.

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