Is China actually imploding?

The press is having a field day with the story that China is imploding.  Furthermore, while China’s equity markets are underperforming, they aren’t imploding. One would imagine they would be if China’s economy was actually imploding. So… Is China actually imploding – or is there an opportunity for investors here? Yeah, I know, you should always trust the media.

Here’s the Google Trends tool for the term “China economy” for the past 12 months. The crowd is following this story, lots of media coverage…

FYI: Never trust the media, don’t follow the crowd, and learn to think for yourself! Read this  for more on that. Anyway…

Here’s the Chinese ARCA index chart. Not imploding

I just posted this in my last blog. That ain’t a breakdown. Its a base.

Here’s the Chinese Bank ETF (CHIX-US). Not imploding

What is intriguing is the fact that Chinese bank shares are not imploding, as US and European bank shares did into the Lehman crisis. The China Financials ETF is trapped in a range bound market, moving towards support, but this ain’t no 2008 financial crises. This could be caused by one of two things: either China is not imploding, or the Chinese government is propping up the shares artificially.

 

Here’s the iShares US Bank regionals ETF (IAT-US). Imploding!

Fun fact: US regional bank shares are underperforming China’s bank shares.

 

Here’s the GSCI commodity ETF. Not imploding – quite the opposite!

Since China is either the number one or number two importer of every major commodity, one would expect that an implosion in China’s economy would cause an implosion in major commodity pricing, which we are not seeing. In fact, the GSCI (seen in the ETF) is breaking its down-trend! Commodities are looking good. Would they be looking good if China was imploding?

Counter thoughts – courtesy BearTraps

“A criticism of this (aka that China is doing better than the media implies) might be in exchange rates, where the Renminbi is much weaker than the US Dollar. True enough, but it is quite strong relative to the Yen, a direct competitor. It is also strong vs the Korean Won.

Tourism in China is strong. We view this not so much as a function of economic strength but as of the post-pandemic exercise of freedom. We aren’t sure how long it lasts. However, it is not consistent with implosion. We think the buying of things is suppressed at the expense of buying of freedoms, and that this hesitancy to buy things is the cause of concern. Car sales are not bad, but again this is consistent with the freedom bid. What does show some indication of consumer buying things is the fact that Alibaba is turning in excellent results. We note that luxury goods are trading well, but this speaks to the upper classes only, obviously.

Conclusion

China’s economy may be imploding, although evidence to that conclusion is mixed. But even if it is, it must be in the early stages, or the indicators above would be in much worse shape. A counter rally, at least, may be in the cards for Chinese equities, given the extremes in sentiment of late. Here’s the China sentiment Optix by sentimentrader.com. Data for YTD. Note the market falls when sentiment is bullish. Note it rallies when coming off of an extreme pessimism signal (lower horizontal signal line), which is where we may be right now…

 

ValueTrend has a small position in a China ETF for that potential.

Final quote from a private PM in Florida. Interesting…

“The media wants u to think China is facing a devastating demographic crisis, a la Japan 1990, and a US financial crisis, a la Lehman 2008.  China has studied this extensively.  Do we think they’re going to just let it all explode?  And when you look at the facts, China has colonized Africa which is the fastest growing population in the world , their banks are outperforming US banks.  They have grown trading partners way faster & more diverse than the US. Their yields are going down while ours are going up.   The facts don’t add up.   It’s all one big lie. The US is the one going bankrupt.  When the dollar and commodities stop following rates, it’s all over.  Said another way, when the deficit bites and the economy can’t support higher rates, the dollar is going to get destroyed and commodities are going to double.” — Florida PM

 

UPDATES

  • I recorded a video on the long bond last week, answering some of your questions regarding their investment worthiness. Here’s the clip. 
  • My MoneyShow presentation has been changed to 12:15PM on Saturday September 9th. It was originally scheduled for 3:00pm.

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