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China Crash

This is a special report on China...


Last night, Chinese markets imploded at the open but then the PBOC Politburo stepped in to save the day. Unfortunately, one day does not make a market. Chinese stocks have been a bellwether for global risk assets since 2008. Like the rest of the world, the Chinese economy never really recovered after the GFC, instead it has been ever-more reliant on fiscal and monetary stimulus. China is the new Japan. Case in point, whereas most of the world - including Japan - is contending with inflation, China is contending with outright deflation. Negative price change.




"Producer prices have been falling for 15 straight months, crushing profit margins to the point where industrial output and jobs are now at risk and compounding China's economic woes, which include a property crisis and debt crunch"



There are many factors weighing on China right now in addition to deflation: GDP growth is at three decade lows, the property bubble is imploding - last week, Evergrande - the world's largest (insolvent) property developer was ordered to wind down its operations. And most recently what's weighing on China is Donald Trump. As we recall, Trump started his trade war against China in early 2018, since that time it's been a roller coaster ride for Chinese markets. Yesterday, Trump called for a 60% tariff on China if he gets elected. Markets know that the probability of Trump getting re-elected is extremely high, despite conspiracy theories to the contrary. A strong jobs market AND a hawkish Fed can't both be good for Biden. Which is the other factor now weighing on China - a hawkish Fed. In EVERY other China collapse the Fed turned dovish before Chinese markets fully recovered. Most recently, in 2018, 2020, and 2022 (see below). The Fed "pause" of 2022 of course was purely imaginary which is why Chinese markets gave back all of their gains in 2023.


This is a chart of the Shanghai Composite v.s. the Nasdaq. What we see is that when China implodes, the rest of the world goes higher for a while. This can be seen in the China / Global Dow ratio in the lower pane. But then when China EXPLODES, the rest of the world soon catches down to China. At that point, Chinese markets begin to outperform the rest of the world - dramatically. What happened in February 2020 is that China crashed early in February while the rest of the world went parabolic due to anticipated rate cuts. Then China rallied and the rest of the world imploded. In March they both went down together. But, China's markets recovered first.


Lunar New Year begins this Saturday, which means the PBOC Politburo will be doing everything possible to support China's markets. Hence I believe we are at the cusp of another reversal moment for China vis-a-vis the world.







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