It’s still all happening in China.
Arguably, China is the one thing that has managed to push Greece off the front page.
China’s CSI 300 index is down 32% in the past month. That’s steeper than when the index collapsed in early 2008 from the record high.
Back then, it took the index more than two months to fall 32%.
That gives you some idea of the severity of the current fall.
Ominously or not, that wasn’t the end of the fall. In 2008, China’s market kept falling from the high, so that by the end of October that year, the index was down 70%.
Could the same happen again?
Only an idiot would categorically say no. So feel free to call me an idiot.
There is still plenty that’s wrong with China. For a start, you’re beginning to see more evidence of why central planning doesn’t work.
Sure, it appears to work for a time. In fact, given the circumstances in China over the past 20 years, you would probably be hard pressed to find an economic system that wouldn’t have resulted in massive growth.
But, in the longer term, over-investment is over-investment. The central planners can’t know for a fact how much of something they should build, or where they should build it.
OK, some of the investment will turn out to be useful. I’m sure that at least some of the much-criticised ‘ghost cities’ will find a use…one day.
But what has happened in China is a classic ‘boom and bust’.
Too much credit, and too much central planning, combined to create too much investment…a lot of it in the wrong places.
That’s why China’s stock market has crashed.
However, this is where most folks in the mainstream are making a big mistake. Their assumption appears to be that China is a ‘fraud’ economy that will now head downhill fast.
I wouldn’t believe a word of it.
As I’ve written many times before, the world’s economy is going through a multi-generational change. Economic power is shifting from West to East in a big way.
Where the US dominated the world’s economy for all of the 20th century, and most of the 21st century so far, China is on the verge of taking over.
In a way, I liken the fear-mongering about China’s economy to the kind of fear-mongering that no doubt had Europeans gloating when the US faced one of its many troubling periods during the late 19th century.
Remember, China isn’t even yet the world’s biggest economy. It could take another 10 years or more for it to get there, even with 6% or 7% annual growth.
So to say that China is finished today, is like saying the US economy was finished as the Civil War raged during the 1860s — almost 30 years before it became the world’s biggest economy.
For that reason, as always, I’m looking at the crash in China as an opportunity to buy. I can’t tell whether things will get worse from here, or whether this is the bottom as the market turns higher.
But regardless of all that, there’s one thing that I’m certain is true: that China is still on pace to become the world’s biggest economy, and in the process it’s set to make the investors who back it to do so very rich indeed.
Our man on the spot in China
Enough from me on China. We’ve sent our own expert on the subject, Ken Wangdong, to see for himself what’s going on there.
Ken, who writes the premium investment advisory New Frontier Investor, is spending the month of July in China attending to business matters and meeting up with key contacts.
While he’s there, Ken is also keep his New Frontier Investor subscribers up to date on what’s going on in China. He sent out this note yesterday:
‘There is still a chance for you to get into the market at a very low level. But finding that right level is now harder to judge, because a portion of the real demand has been replaced by broker money.
‘Market pricing has unfortunately lost its predictive powers.
‘The ideal situation is for the market to fall to a level where it fully prices in demand and supply, as well as the future accounting values of the companies.
‘That may not happen easily, given the government’s determination to intervene in the market.
‘Therefore, we will just have to do the best we can.
‘Right now, the market is undervalued according to my calculation. However, with all of the uncertainty, I recommend a wait-and-see stance.
‘If the market can correct properly, it will give you another great entry point. Because China is not going to stop growing. Yes it is going to have hiccups, but that doesn’t mean the country is going to collapse.’
Ken also told his readers that he’s not particularly happy that China’s government has intervened in the market:
‘I wasn’t happy to hear that the government had decided to bail out the equity market. Not because I think more people should lose money during this violent deleveraging. And certainly not because I want to see the NFI China stocks fall further.
‘It was because I knew that the government was starting to meddle with market prices in an unhealthy way. This meddling is going to distort market activities and prices. It is going to render the market’s ability to price assets useless (it has already done that to some extent).
‘It throws out fundamentals and is turning the China market into a bit of a mess in the short run.
‘The government’s meddling in the market is hurting its own reform process in the capital market and it is hurting its own credibility. Ultimately, it will cloud and mute the buy-in opportunities for buyers.’
I can almost hear the frustration in Ken’s words. Although, he may be a little happier with China’s stock market performance yesterday.
As of yesterday’s close, China’s CSI 300 index is up 6.4%, and Hong Kong’s Hang Seng index is up 3.73%.
You can find out more about Ken’s investment advisory here, including the stocks he’s backing to make big returns as China’s economy continues to grow.
Editor, Port Phillip Insider
Ed Note: This is an excerpt of an article first published in Port Phillip Insider