Skip to main content

Expectations for China

I recently took a small position in the UltraShort FTSE/Xinhua China 25 ETF (FXP). This is the inverse fund corresponding to the FTSE/Xinhua China 25 ETF (FXI). After peaking in October, FXI has been moving down. It now appears to be forming a wedge-shaped chart pattern (see chart below). Price action on FXI has been narrowing as the ETF begins to get close to the point where the downtrend line meets the horizontal line. It has seemed like we are overdue to find out whether FXI was going break out to the bullish side or to the bearish side. On Thursday of this past week, it looked like the outcome had been resolved in favor of the bulls. Then on Friday, the ETF fell back inside the wedge. We remain waiting for the breakout.

Chart of FXI
Well, I'm no expert on China so I have been relying on the charts. What are others saying about the economic outlook in China?

According to academics from Wharton, China's economic situation is fairly positive though it is harder to predict the direction of stocks. Rather than focusing on the US impact on China, management professor Marshall W. Meyer feels that China's impact will be felt by the rest of the world.

He makes the point that China's huge demand for oil, metals and other commodities has pushed commodity prices up around the world. Now Chinese officials are taking significant steps to slow their economy to control inflation, Meyer says. That should stop the spike in commodity prices, but it also will likely cause a slowdown in growth worldwide in 2008. Referring to skyrocketing food prices, Meyer says that "the central government is adamant about restraining credit and, where they can, restraining prices, because the failure to do so creates social dynamite."

To stem inflation, Chinese officials have moved to tighten credit. Regional bank branches have been directed to assure that money is lent only to borrowers likely to pay it back. In addition, in a move meant to deflate the Chinese stock-market bubble, regulators have told Chinese mutual fund companies to stop buying Chinese stocks.

Meyer says that "the assumption has been that global growth will be driven by China and India." In addition, Meyer says he can't predict a recession in the U.S., "but I can see a slowdown in global growth because of the tightening in China."

Andy Xie, an independent economist and former managing director of Morgan Stanley's Asia/Pacific economics team, has a somewhat more positive outlook. He feels a US recession is a definite but in spite of that, the outlook for emerging markets remains robust.

Despite his positive outlook, Xie feels that China will see some challenges. Many analysts have discussed the vulnerability of China's export-led economy. "The Chinese are going to suffer," Xie predicts. "Whereas in the past, the U.S. used to absorb Chinese savings and products, it will now want to turn the tables and export to China. "It's going to be an enormous challenge for us. Next year is the first year of this new world."

What will save China, however, is increasing trade with other emerging markets. Xie notes that China's exports to the West are already winding down. He predicts a 10% to 15% growth rate in these exports over the next year compared to a growth rate of more than 20% in recent years. This trend is partly due to market saturation, he says, and partly due to the loss of some cost advantage to countries like Vietnam and Bangladesh.

Emerging market trade already accounts for half of China's trade growth, says Xie. These economies export precisely what China needs -- commodities such as oil, copper and iron ore. In return, they buy cheap Chinese-made consumer products and capital goods. "In the short term, this is going to be a huge cushion for China," says Xie. "Next year, exports will continue to grow."

Appreciation of the yuan has been much discussed in the financial press and has been something that has been encouraged by western governments. Scott Chu, Pioneer Funds' China representative, thinks it will have little impact on East-West trade. "When the yuan gradually appreciates, those low-margin, labor-intensive, heavily polluted and low-value-added industries will be forced out of China, and enterprises will start upgrading themselves into high-value-added businesses while also trying to improve their efficiency. That's why in recent months, you see that China's trade surplus number is actually going up instead of going down."

Chu also sees "real estate consumption... going up steadily. In short, China's consumption, exports and investments are all healthy, which suggests a 10% or above growth for 2008." Adds Xie: "My hunch is that next year is okay," but he cautions that it would be an altogether different story if the U.S. falls into a deep recession, with 2% or 3% negative growth for the year."

This is despite the central government's efforts to cool investment in real estate. Property prices will only fall when the U.S. dollar strengthens and liquidity starts to flow out of China, according to Xie.

What about Chinese stocks?

Touching on expectations for Chinese equities, Xie is upbeat. Following the subprime crisis, money that would have flowed to the U.S. will instead come to China, he predicts. "Wall Street financiers, ... are arming themselves with funds and taking aim at China... So the asset bubble you are seeing here is probably going to become bigger" next year.

Meanwhile, Chu, when asked whether the P/E ratio is too high for China's listed companies, notes that "in certain periods of emerging markets, concurring currency appreciation and excessive liquidity, it's common to see a high P/E ratio. You can't simply compare China to Japan, the U.S. or Hong Kong, since the capital flow in those mature markets is free and is looking for the lowest P/E ratios with the highest profit growth companies. But in China, it's a different story because the country has relatively tight regulation on foreign exchanges and there are limited choices for investment."

In general, he concludes, China's stock market is more expensive than those in the U.S. and Europe. But there is logic behind it. "First, it's an indicator of high growth... Some companies in China are in a monopoly position and therefore it's understandable to see high P/E ratios.

"From the perspective of demand," he continues, "you can see that with an inflation rate of 6% to 7%, the ordinary Chinese people are moving their bank deposits to the assets market. As long as the actual interest rate is negative and the yuan keeps appreciating, the money from both home and abroad to buy these assets will keep on growing, and growing fast."

Chu suggests taking a cautiously optimistic approach to China's A share market in 2008. "It will be very good if you have a return of between 10% and 30% next year. My view is that after the first quarter of 2008, the market will have a deep correction."

Meanwhile, in early December, China's government announced a "tougher" economic policy for 2008, which is a rare and significant change in its official stance. Chu says that the biggest risk for China now is inflation. "The actual inflation rate is far exceeding the official number of 6.7%. If inflation expands to a certain point, it will be a disaster for the whole economy and the stock market as well."

Zhou Qiren, an economics professor at Peking University, noted in a speech in Beijing in early December that the main challenge China's economy faces comes from its currency. "Excessive liquidity is reshaping the price level and pushing up all the [basic] costs." Adds Zhou: "It's unprecedented in the history of [mankind] that labor, information, technology and capital can be flowing freely and be re-organized around the globe. This forms the basis for a big transformation. China has experienced tremendous growth in the past three decades. But I see 2008 as a major turning point for its economy."


It seems that the experts see continued strong growth in China. "Decoupling" is more real than many of the US pessimists think. Trade with other emerging markets will support economic growth in China. A strengthening yuan could actually benefit China.

On the downside, inflation is becoming a serious issue among the populace. Food prices are soaring. Petroleum prices are rising and are being held in check by government decree. Prime Minister Wen Jiabao announced that China would freeze energy prices in the near term. Banks are seeing limits put on lending. The government is raising interest rates.

What does this all mean for Chinese stocks? It is difficult to say. Chinese stocks are clearly showing a rich valuation but, as described above, there are valid reasons for that. Others are saying that we are witnessing a bubble and that eventually the stocks will come back to earth. The experts are expecting a moderation in growth from a previously torrid rate but are wary of risks from domestic inflation and a potential severe recession in the US.

Will all this be sufficient to cause a breakdown in the FTSE/Xinhua China 25 ETF? I'm back to watching the charts.

Sources: What's Ahead for the Global Economy in 2008? Reports from the Knowledge@Wharton Network

Disclosure: author owns shares of FXP


Anonymous said…
Be alerted to the Hottest Stock Picks!
Join Emerging Growth Alert Newsletter

By joining the team at Emerging Growth Alert you will be in position to receive stock alerts profiling stocks about to move or already in motion. Our alerts are sent in time for you to research, investigate and make a decision about whether this opportunity is right for you.You will not be bombarded with junk mail. There is ABSOLUTELY NO OBLIGATION, and the service is entirely FREE.
Unknown said…
Dear All,

Your blog is nice and informative. We think our post will be quite useful and informative for your visitors. Now we have seen that market is going up and up and at every rise it is coming down.
So we suggest one need to be very careful at every rise.Right now Reliance Power IPO is coming which is looking very attractive and is really not be missed type of IPO.
DO apply for it and in coming days we can see Reliance group flying in the Indian Stock Market.


ShareTipsInfo Team
Anonymous said…
I always like to think from the logical term instead of only from the experts point of view.

I learned that 10% of the rural maids that came to Shanghai to work has turned into stock traders.

This is a serious matter. What do maids know about investing and trading?

Our economy in Malaysia had the same problem prior to the financial crisis in 1997. Our taxi drives were busy discussing about stock market back then!
Anamika said…
Market is all set to touch old highs. So, get invested in stocks you like and enjoy profits. Keep watch on BSEIndia website for updates in stock market and to get Free Share Trading Tips
Anonymous said… is the leader in giving share tips for Indian Stock market. Let the Market go up or down, With our tips, you will always be in profit. With the team of our chartist giving excellent share market tips, we are always able to provide 80% success ratio. There results can be found in our website shareinfoline in Past Performance Page. The Past Performance is free to view and the share tips over there would help you to become our member and get our shares & stocks tips.

We also provide commodity tips and our results are comparatively far better than other players in this field. commodities trading have become quiet common and has got a good volumer.

Visit for more details
sharetipsinfo said…
Now result season is going on and results are not that positive in broader terms. More or less results are mix for Indian companies. Still Indian stock market requires one triggering point which can give clear trend in the market.

Still Nifty is in mix zone. Nifty will be bullish only if Nifty manages to trade and sustain above 3150-3200 level below these levels bears will rule the dalaal street.
Few Stocks to stay away from for short term
1. DLF
2. Satyam comp
3. Bharti Airtel
4. Tata steel
5. Rcom

Please feel free to contact us for any query.

Regards Team

Call at:-


On Yahoo Messenger Chat Id: ShareTipsInfo or ShareTipsInfo_1

On Google Talk Chat Id: ShareTipsInfo1

Mail at:-
Priya said…
Stock market is a volatile market. Where people invest with the intention of making money but many traders and investors end up as a looser. Must be wondering what makes one trader a winner in the stock market and another one as a looser in the market.

In Indian stock market many people have many doubts but they don’t want to clear them by consulting professionals nor they want to raise there questions where other traders and investors can help them out. But now many portals are coming up with QNA sections where investors and traders can exchange there views about stock and stock market. Indeed it’s a great help for everyone who are related to stock market.
Priya said…
Stock market is a volatile market. Where people invest with the intention of making money but many traders and investors end up as a looser. Must be wondering what makes one trader a winner in the stock market and another one as a looser in the market.

In Indian stock market many people have many doubts but they don’t want to clear them by consulting professionals nor they want to raise there questions where other traders and investors can help them out. But now many portals are coming up with QNA sections where investors and traders can exchange there views about stock and stock market. Indeed it’s a great help for everyone who are related to stock market.

Stock Market Trading Tips

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:

Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:

Results here were actually quite good and, to make things even better, the previous month was revised upward.


Alert HQ has moved!

End of an era!

This site was started way back in 2006/2007 to showcase my blog posts and the Alert HQ buy signals and sell signals. Alert HQ grew to include other kinds of stock alerts including Swing Signals, Trend Busters, Trend Leaders, Cash Flow Kings and more.

In the meantime, I built a sister site, and I started using some of the same Alert HQ content over there. As a result, I am discontinuing the Alert HQ data here at

The good news, however, is that all the Alert HQ signals and stock screens are still completely free. In addition, the pages have been enhanced so that you can hover over a stock symbol and a small chart will pop up so you can get a quick look at the stock's recent price action. If you click on a symbol it will take you to a page with plenty of financial and technical analysis information (still free!) as well as a larger chart that you can play with in terms of adding or deleting indicators, moving averages, etc.

Click …