Global Hopes Burst by China Bubble
On Monday, Aug. 31, 2009, the Shanghai exchange took a nosedive, plummeting 6.7% to 2,667.745.
Investors headed for the exits following more talk about tighter credit lending standards. The sell-off marked the second-biggest monthly loss in 15 years.
The Index fell below the 125-day moving average for the first time since early February. According to Reuters, the drop below the key chart line, used by many Chinese investors to delineate a bull versus a bear market, encouraged more investors to flee stocks.
“Shorts and longs may still fight for control of that (125-day moving average) level in coming days, but the market will in any event remain sluggish in the first half of September as investors await August economic data,” said analyst Qian Xiangjing at CITIC-Kington Securities in Hangzhou to Reuters.
It’s very well known that China has been the leader for the global recovery, driven by aggressive policy moves directed from the Chinese government. And markets around the globe have followed the same bullish pattern as the Shanghai Composite, which, in turn, is leading many investors to question the viability of future equity gains in other indices.
In July, the Shanghai Composite had a short-term double top, thus resulting in a correction to the 2,761 level – a 21% decline from the Aug. 4 high, which retraced 38% of the rally from the October 2008 low. The greatest risk to consider now is if this is the start of a new bear market.
A New Bear Market?
Reuters added: “A convincing breach of the key moving average, which analysts said still requires a few days to confirm, would put the index next support at 2,500, a more psychological level than technical one. That would suggest a market more driven by investor sentiment than by fundamentals.”
Monday’s sell-off followed a 2.9% drop on Friday amid worries about a steep drop in bank lending in August. Investor sentiment is quickly deteriorating as many believe the flow of money into the Shanghai Composite will slow due to a drop in lending.
But analysts told Reuters that slowing lending should have no major impact on the economy, partly because Chinese companies are turning a large share of the short-term discounted bill financing they received in the first half of this year into long-term investment in the second half.
“We believe that the plunge since early August, after the 103 percent gain since late 2008, was likely triggered by excessive fears of aggressive policy tightening, while the fundamentals remain intact,” JPMorgan’s Hong Kong-based economist Qian Wang said in a research report late last week.
“The implications for the real economy are likely to be modest; we hold to our view that Chinese real GDP will expand a solid 8.4% on year in 2009.”
At Least One Bull Market
But there may just be a raging bull market in one of China’s provinces… One that investors will want to jump into with both feet.
It’s time to build a bandwagon, because Mongolia will be the fastest-growing economy on earth for the next 10 years. It is abundantly rich in minerals because of poor production during the communist years, followed by poor production during the socialist years.
But a recent election swept the Mongolian People’s Party to power with a gain of 76 seats. And the new guys want growth. One of the first things the new government did was scrap the draconian tax laws on mining companies.
According to Forbes:
Mongolian lawmakers scrapped a controversial tax that was delaying a multibillion-dollar deal on a new copper and gold mine, clearing the way for Rio Tinto Ltd. and Canada’s Ivanhoe Mines Ltd. to go ahead with the project.
Lawmakers voted Tuesday to phase out a windfall profits tax in 2011, removing the last obstacle to a deal with Ivanhoe and Rio to develop the Oyu Tolgoi mine in the Gobi desert. The tax was enacted in 2006 at a time of surging metals prices, but miners said it made tax rates too uncertain and would discourage investment.
Not only was investment stalled, it was non-existent. HardAssetsInvestor.com says:
In particular, the new legislation revokes a draconian windfall profits tax, which exacted a 68% tax on Mongolian copper and gold. The levy applied to any copper sold above $2,600/ton and any gold sold above $500/ounce. (For comparison's sake: Copper now trades around $6,470/ton on the LME; gold currently hovers around $960/ounce.)
Another revoked law gave the regime a 34% stake in mines explored without government funding – and a 50% share in projects that had such funding.
Under the new deal the government gets a 34% ownership in mines.
Another Way to Profit
But there may be another way to profit from China.
Over the past year the Shanghai Index has been up 102% – a remarkable run in anyone’s book. Yesterday, in a move that suggests it has run too far, too fast, it gave up 7% in the session.
This pulled the bears out of the woodwork. According to Bloomberg:
“The Shanghai Composite Index, the world’s worst performer in August, may fall another 25 percent as China’s economic recovery isn’t 'sustainable,' former Morgan Stanley Asian economist Andy Xie said.”
Xie added, “The market is in deep bubble territory.”
Perhaps; it’s not hard to argue that the index needs to consolidate. The Shanghai is full of speculators and it goes from boom to bust with more rapidity than the NYSE – and it moves more on government signals than it does on antiquated things like earnings or dividends.
The 102% gain this year was due to the fact that China pumped $586 billion into the economy and did it with speed. Much of this money has been misdirected and misspent, but i t should be enough to push the GDP to a 9.4% growth rate in the next quarter.
This, of course, makes the mandarins nervous about overheating, so they are cutting the amount of new loans. Again from Bloomberg:
China may have 200 billion yuan of new loans in August, the Beijing-based Caijing reported today on its Web site. That compares with 7.4 trillion yuan for the first half of 2009 and 355.9 billion yuan in July alone. The government plans to tighten capital requirements for financial institutions, three people familiar with the matter said this month.
That’s all well and good. The short-term lesson you take away from this is you should sell China now and buy back on the dip.
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