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Why This Chinese New Year is Very Important for the World
12:57 PM MST | February 11, 2010 | By SIGMUND FLOYD
Sigmund Floyd is President of Valushar, a management consultancy focusing on strategy and tactics for multinational companies operating in
It has become widely recognized that since the financial crisis the Chinese economy has taken on the leadership role in the global economic recovery. This was forecast as early as Q1 2008 by George Soros in his book on the then-evolving credit crisis; Soros was also one of the few who then foresaw the magnitude of the crisis. With the benefit of hindsight, it is important to recognize that the Chinese stock market, usually represented by the Shanghai Composite (SSEC), is also taking a leadership role on the global stage.
Can China build the new global economy?
Photo courtesy Jakob Montrasio's flickr photostream, via creative commons
It is generally accepted that the stock market is a leading indicator for the overall economy, though clearly, there are exceptions – the Bull Market highs of 2007 were in no way predictive of what was about to unfold as the global economy collapsed under the cumulative weight of failed speculative financial instruments. Since the global market tops in late 2007, moves in the Shanghai Composite have tended to precede moves in the US Dow by 2-4 months. This includes intermediate bottoms in the Dow in March, early July and November 2008 and June 2009, as well as the major bottom in March 2009. However the roughly 25% correction in the China market which took place early August 2009, following its gains of over 100% off its lows in Nov. 2008, was not followed by a pullback in US/global markets – until recently. Indeed, on the back of general optimism about global recovery not being confined to China, the Dow and other US and European indexes went on to make new highs but the SSEC failed to confirm these new highs, reaching only around ≈94% of its August 2009 top before turning down late January. At that time, US and European markets also fell simultaneously, based on an investor “paradigm shift” as recognition that global recovery might not be as solid as hoped, in part due to the prospects of default of weaker countries in the Eurozone, spread like wildfire.
What is disquieting as of this writing is the SSEC (Feb. 11 Close: 2986) has become the first major global index to yield to its 200-day simple moving average (S200), currently at 3013. Position vs. the S200 is one of two commonly-used criteria of whether a market is in a fundamentally Bullish or Bearish configuration – the other one being a greater than 20% pullback from highs, which the SSEC had already demonstrated as of last August. The SSEC closed below the benchmark moving average on Jan. 27 for the first time since March 2009, and despite several attempts to retake it has now spent 9 out of 10 days below it. While it has also found short-term support at around 2920, its short-term configuration, like that of overseas markets, remains quite fragile.
While there can be no question that the Chinese economy is the world’s tractor at present, there is rightful skepticism whether it can indeed pull the rest of the world back from the brink. However, a major retreat from the targeted 8-9% growth in the Chinese economy would equally unquestionably be disastrous for global business confidence. The US is staring down real unemployment rates of ca. 20% (meaning roughly 1/5 of the population is in some degree “economically idle”), while Europe continues to wrestle with high costs of maintaining its social structure in the face of a weakened tax base and sluggish (albeit improving) exports. The additional “tax” self-imposed by the US and now Germany from their expanding commitment to Afghanistan is far from helpful. Meanwhile, US-China tensions are on the rise again, partly due to events like the attacks cited by Google (probably the tip of the iceberg in China’s silent cyber war) and partly due to perennially recurring issues like the trade deficit, arms sales to Taiwan and Tibet. Besides strenuously resisting interference in its “internal affairs”, it should be underlined that China is basically not disposed to accept foreign pressure on the Yuan revaluation issue – those who hope for anything more than a token gesture in this regard are likely to be disappointed.
Coming back to the stock market, the period between the start of the new Chinese New Year and end of first quarter is generally regarded as a Bullish period for Chinese stocks. This period has been positive in 7 of the past 10 years with average gains of around 3.5%. Indeed, Q1 as a whole is similarly positive for Chinese stocks, with average gains of nearly 8% in the last 10 years. While the Chinese market was down in five of the last ten (Western) calendar years, it was only down in one year that showed strong Q1 growth (2004). In Q1 2010, so far, the Chinese market is down 10%.
Our conclusion is that the period between Feb. 22 when the Shanghai market reopens to end Mar. 2010 will be a critical barometer for both the Chinese and the global economy, indeed, perhaps more important for the latter. The Chinese government is doing the needful to ensure it meets its own priorities, which are to reign in the rampantly speculative property market and being vigilant against general inflation while staying “on plan” for growth, which is important for social stability. Indeed, it is doing what in any other circumstances would be viewed as eminently logical by most of the global community. Though there is no question that tightening is already underway through administrative guidance of lending, it is encouraging that just prior to start of Chinese New Year the head of the People’s Bank of China (China’s central bank) Zhou Xiaochuan made statements that have been interpreted as a dovish signal that actual rate hikes will not occur until Q2. We hope this sets the stage for a strong New Year rebound in China, retaking and holding the S200, which could help revive ailing global markets. The alternative, continuing declines with Chinese markets breaking the recent lows, would open up some quite scary scenarios - we will discuss these if and when that situation unfolds. We wish all our readers a very happy and prosperous New Year of the Tiger.