Markman Capital Insight

How China manufactured a stock market rally in the nick of time

We've been writing about the advance of Chinese stocks of late, and wow -- look at them go. The chart above records their moonshot this month, up 18.7% with upside gaps many days that show a lack of sellers. For sure, I should have recommended that we enter these stocks via an instrument like iShares China (FXI) before now, having been a gawking bystander. But after lashing ourselves with a wet noodle we should just find an entry point in the days or weeks ahead and start.

Why now? Chinese stocks have outperformed U.S. stocks since 2005 by a ridiculous degree -- about 3.5x. Most of that came before 2008 amid the rush to build infrastructure like a massive road complex, cities, plumbing, railroads, airports and the like. Since 2010, the gravy train stalled out as the government pulled back on investment amid concerns that a credit bubble was about to lay the country's financial system to waste.

But now the concern is that credit was withdrawn too quickly and there is a headlong rush to invest in consumerism, make long-needed reforms and engage in an infrastructure build-out well beyond the country's borders -- creating a new Silk Road, if you will, from the mountains of Tibet through Pakistan and India to the Middle East, Africa and Russia.

The proximate cause for excitement in China was news that the government is looking to radically reduce to the number of state owned enterprises - like China Petroleum and Chemical (SNP), otherwise known as Sinopec -- through mergers to 40 from 112. The goal of consolidation would be to streamline the businesses and improve competitiveness. Hello, eurozone, are you paying attention?

The prospect for additional monetary policy easing amid weak progress in the economy also got people fired up. The Shanghai Composite has now rallied for seven consecutive weeks and is up +35% during that period. Hong Kong (EWH) stocks have also jammed higher in response.

-- Jon D. Markman

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