The Asian sell-off is one of the dominating market stories on Monday. In particular, attention is focusing on the spill-over from China’s recent equity slide and into more open markets like Hong Kong.
The chart below, of the Shanghai Composite, shows the degree of the turnaround in Asian sentiment.
As can be seen in the Hang Seng, meanwhile, there’s some indication that weeks of range-bound trading are beginning to break support.
So how important is the above, considering Chinese GDP and other economic indicators are still the envy of the world? Historical evidence would suggest extremely so — China’s indices have presented themselves as a major lagging indicator for the rest of the world’s markets of late.
Meanwhile, there’s increasing anecdotal evidence that China’s economic situation could be no more than a contrary indicator for recovery — this is particularly so with regard to its recent spate of epic commodity stockpiling, now seen as unsustainable going into the second half of the year. The point is picked up upon by Vitaliy Katsenelson, director of research at Investment Management Associates, in this weekend’s New York Post. As he states:
In fact, there are no bad times for China. You’d think that an export-based economy would at least take a pause when its exports to the developed world drop off the cliff. No, not China, which spit out growth numbers last week that are the envy of the West even in the West’s best times. The country showed robust GDP growth while electricity consumption declined. The laws of economics appear to be suspended for the Chinese — but they are not.
They just have “better” accountants — ones that would make Enron’s bean counters seem like dilettantes.
And he goes on:
Though the Chinese economy constitutes only 7 percent of the world economy, it was responsible for a disproportionate amount of the incremental demand for oil, metals and industrial goods. When the global economy went into recession demand for “stuff” evaporated — and stuff stocks dropped. But recently they had a serious rebound on the hopes that Chinese economic growth would result in revival of demand for their goods. However, the fictional growth coming out of China is putting that hope to rest. If you own these stocks, you’ve been warned.
Related links:
China’s fake recovery – FT Alphaville
You kiddin’ me? Questioning China’s robust rebound – New York Post