Regarding the Chinese economic rebalancing act and the Chinese stock market The Financial Times noted that investor sentiment swung from greed to fear in just a few months last summer.
China is the world’s biggest economy in purchasing power terms but its secretive political system, unreliable statistics and restrictions on foreign investment make it one of the least-understood markets among global investors.
This fact was on display over the summer as global sentiment on China swung from greed to fear in the space of just a few months. The bursting of an equity bubble was compounded by Beijing’s decision in early August to change the way it sets its exchange rate – a move many investors interpreted as a sign of panic and incompetence on the part of Chinese policymakers.
The resulting global sell-off and currency market turmoil was largely based on a sudden realization that the Chinese economy has slowed a lot, and is likely to slow even more in the future.
For those who follow China, this is hardly news. Supercharged growth rates have been declining for several years, with annual real GDP sliding from 10.6 per cent in 2010 to 7.3 per cent last year. This year, the economy is projected to grow by a little under 7 per cent, its slowest pace in a quarter-century (although some question even that state figure).
The article provides a nice analysis of what to watch out for when investing in China. Our focus is on the relationships between greed, fear and investing. In that regard the fact that the Chinese market is one of the least understood should be a big warning sign for investors. And the dwindling GDP figures, albeit fudged, should alert investors to more problems on the way. Greed and fear are the twin demons of investing. Their antidotes are sound fundamental and technical analysis. The fact of the matter is that many investors get greedy and forget to do or follow the results of their fundamental and technical analysis.
On the fear side of the equation regarding China the Sydney Morning Herald wonders out loud if China’s economy is heading for a crash.
Markets are well aware that China’s exceptional growth rate is finally slackening but economists are increasingly cognisant of this slowing could turn into a crash for the world’s second largest economy.
Concerns are beginning to rise about China’s future economic prospects. While the International Monetary Fund chose not to downgrade its economic forecasts for the country’s GDP, Citi’s chief economist Willem Buiter has warned China will drag the rest of the world into a global recession.
“We consider China to be at high and rapidly rising risk of a cyclical hard landing,” Mr Buiter and his economist colleagues said in a report. “The reasons behind China’s downturn and likely recession are familiar: rising excess capacity in a growing number of sectors, excessive leverage in the private sector and episodes of irrational exuberance in asset markets.
The doom and gloom view of China these days is probably excessive and investors who play into this fear driven view will miss out on investing and trading opportunities.
Despite our admonition that greed is one of the twin demons of investing and trading, there are times to be greedy. Think of the “blood in the streets” adage to invest when things seem at their worst. The cornerstone of this approach, however, is sound fundamental and technical analysis! The Financial Post asks, what would Warren Buffet do, in regarding to investing today.
For contrarian investors, it’s an article of faith that the majority is often wrong, or at least wrong often enough that you can make some decent returns by betting against the herd.
Coming off a terrible few weeks in the markets, there’s little doubt right now that the herd is motivated by fear. Commodity prices remain depressed, driven down by the slackening Chinese economy.
There is a tendency, driven by fear, for the market to overshoot on the down side when economic news is bad. Using technical analysis a trader can time his purchases as stocks hit bottom and make tidy profits on the upswing.