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China May Not Pull a “Japan” After All

25 October 2012 in Trading Ideas

Are the bulls back in China?

While 2012 may not be considered stellar by those investing in Chinese stocks – the Shanghai Composite is down about 4% for the year, while the Global Dow Jones Index has gained 7% — investors have recently returned to bidding the country’s shares higher.

The Shanghai Composite is up about 4% during the past month, outpacing the Global Dow’s 2% drop.

Similarly, the China Internet motif is one of the past month’s top performers, rising 1.9%, while the S&P 500 has fallen 2%.

Part of the turnaround seems to come from the perception by investors that the so-called hard landing expected for China’s economy may be avoided. On Tuesday, the country’s purchasing manufacturer’s index delivered a preliminary reading of 49.1 – still technically a contraction, but above the 47.9 level for September.

As a Bloomberg News story pointed out, the PMI survey may bolster prospects that China’s expansion will bounce from a three-year low after official data showed exports, production and investment accelerated last month. A report by Morgan Stanley declares that the Chinese economy is “bottoming out” and growth will likely accelerate during the next few quarters.

The longer-term significance, of course, is that this may help build the case that one of the ultimate fears about China – that it faces a Japan-style economic boom and bust – could be avoided. 

As a recent Reuters story notes, whether that happens has much to do with how quickly China can change its export-driven economy into one more geared to services and domestic consumption. Those who think China can avoid a bust point to how far the country has yet to grow.

For example, China’s per capita GDP last year was $5,445. When Japan’s economy crashed in 1990 and began its “lost decade,” its per capita GDP was $43,000, in 2011 terms.

Others, however, continue to point to high housing prices in China as being ripe for a bubble-then-bust scenario. Bank of Japan Deputy Governor Kiyohiko Nishimura wrote in a recent paper that property bubbles popped after loans and working-age populations peaked. China’s working-age population is close to peaking, according to Nishimura.

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