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Market Overview

Market Overview

Overview June 22, 2015

Author: John Hsu/Friday, June 12, 2015/

In the last few months many China specialists have declared that the China market is a bubble ready for bursting. It does not take a rocket scientist to make such a call since the CSI 300 Index is up 51.5% YTD as of a week ago and during last week the China market was down 13%. Mark Mobius of Templeton fame had called for a 20% correction some time ago.

We believe that a correction is healthy and very much in order and the Shanghai market is overdue for one. Perhaps what is even more important is to balance the overall viewpoint with a reminder about 1) the current status of the Chinese economy and 2) central government goals and policies and the policies of the PBOC going forward.

The stated goal of the central government is to achieve a GDP growth rate of 7% and the central bank has been supportive of that goal in providing stimulus to the Chinese economy. Earlier this year the PBOC twice reduced the reserve requirement for major banks, altogether by 150 basis points. So far all indications point to the PBOC continuing its aggressive stimulative policies since the economic response has continued to be somewhat tepid.

It is also important to remember that while almost all major global economies have been printing money to excess to stabilize and revive their individual economies, China’s central bank is the only one that has almost $4 trillion in reserves, so the Chinese have plenty of ammunition to achieve their goal.

We therefore believe that the recent drop in share price is part of an overdue correction/consolidation of a healthy long-term bull market which will not end until the Chinese economy begins to re-inflate and the PBOC terminates its stimulative measures. At that point the marketplace will then begin to shift its focus and concerns toward inflationary pressures. In other words, we maintain that this is the classic “sweet spot” of a market cycle.

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