The Shanghai Composite Stock index lost a third of its value in 2010 and 2011. Trading a Chinese stock decline could continue into 2012 as well. Europe is China?s biggest customer and the prospect of fiscal austerity coupled with another recession in Europe has driven Chinese industrial production downwards. Stocks in China are down across the board, including banks, general manufacturing, shipbuilding, and commodity related companies as demand falls. Years of upbeat thinking about Chinese stocks has turned to pessimism. The other day the Shanghai Composite Index fell just under two percent while Chinese stocks that are heavily traded in the USA fell just over two percent. Is this the time to buy Chinese stocks in anticipation of a rebound or will the Chinese economy and stock market need to sink a bit more?
In trading a Chinese stock decline traders do well to look that the Chinese economy in general. In an attempt to cool off an overheated real estate market Chinese banks have raised interest rates three times in just the last year. There is common belief that China is in the midst of a real estate bubble that is ready to burst. In an attempt to maintain employment as exports have dropped China has funded a wealth of internal projects. Some, such as high speed rail are genuine improvements in infrastructure. However, the building of whole cities in the interior has many scratching their heads. A recent tour by an Australian news agency showed empty apartment buildings, empty malls, and empty streets in cities built for millions. Private Chinese investors seem to have gotten the same fever as investors in the USA prior to the stock market crash and bursting of the US real estate bubble. An ever present issue in China and for investing in China is the lack of transparency. One is reminded of the rise of Japan in the 1980?s which has been followed by two decades of slow growth and near zero interest rates. Too many loans were based on good old boy networks and not visible to the outside investor. Those trading a Chinese stock decline ought to factor in this lack of transparency in Chinese stocks and banking when deciding if the slow US economic expansion will be followed by a Chinese stock recovery. In trading a Chinese stock decline, traders can use the same tools that apply to US stocks, individual stocks, index funds, and options trading. The safest bet for trading foreign stocks is commonly to trade stocks that are listed as American Depository Receipts. Analysis of market sentiment and fundamentals are important but remember that what you see in a Chinese stock may not be what you get.
Chinese analysts are predicting a fall in industrial output in the first quarter of 2012 but an increase of ten percent for the year. Unless the worldwide recovery hastens and Europe comes to a quick and unexpectedly successful resolution of its debt crisis China will need to invest internally to a greater degree to maintain growth. By comparison the IMF is predicting a significantly lower growth rate for China for the year and a rate as low as four percent if things get worse in Europe. It would appear that traders will be trading a Chinese stock decline as well as decline when trading Euro zone stocks and not a rebound for the next year or so.
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