Thursday, July 23, 2009

China's Balancing Act

The Economist reports:

Chinese growth was already the envy of the world. Now recession-stricken countries will be turning an even brighter green. On July 16th new figures showed China’s GDP growth quickened to 7.9% in the year to the second quarter. That is healthy enough by anyone’s standards but the headline number conceals a more astonishing rebound. Goldman Sachs estimates that GDP grew at an annualised rate of 16.5% in the second quarter compared with the previous three months (see chart 1). Over the same period, America’s economy probably contracted again. China’s economic stimulus has clearly been hugely effective. So effective, indeed, that some economists are now worrying it may be working rather too well.

It has been reported that while the stimulus plan has been tremendously effective, a lot of the money from those new bank loans have been invested directly into the market. The result has been a massive rebound (as seen in the ETF FXI) in the Chinese stock market; now up 60% over the last six months, though it should be noted the ETF is still down 40% from its peak.

So the million dollar question... is this the next bubble forming or will China's decoupling story finally come true?

Update: Reader Yuri points out:
FXI actually tracks shares listed in Hong Kong that have their main operation in mainland China - the so called H-shares. They are in fact closed to Chinese mainland investors and are primarily the realm of foreign investors and often trade at a hefty discount. Therefore the market madness that is going on there is obviously not reflected in this index. It only reflects international investor sentiment about China.