China’s bear market won’t last – these two economies show why

After seeing spectacular gains in the last year or so, Chinese stocks are now officially in a bear market. They may fall further yet, says John Stepek, but the bull market is by no means over.


Chinese stocks may fall further yet, but the bull market is by no means over.

Not much new happening in Greece.

So maybe it's time to take a break from spending all of our time focusing on a small European country that accounts for 2% of the eurozone's GDP.

Instead, we might want to consider turning to one of the world's biggest economies, emerging superpower, and now official sufferer of a bear market.

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Yes, it's China. And the turbulence in its markets over the last week or so makes the knock-on effect of Greece's drama look tame.

A bear market takes hold in China

The Shanghai Composite Index is down by more than 20% since it hit a seven-year high just a few short weeks ago, on 12 June. That means it's officially in a bear market (20% down is a bear', 10% down is a correction').

It's clear that the government is getting a little worried. The central bank, the People's Bank of China, cut the one-year lending rate by 0.25% to 4.25% at the weekend. That's the fourth cut since November. It also reduced the level of reserves banks have to hold.

The government has also been using the state media to tell everyone effectively it's safe to get back into the market!' Apparently, say the regulators, an excessively fast correction' is not healthy, which suggests they'd be more than ready to intervene if things don't go their way soon.

That might be why the stock market index rebounded sharply this morning to end higher, having swung around wildly during the session.

There are reasons for the correction. They range from disappointment that index provider MSCI decided against including the market in its global benchmark index as yet - earlier this month. There have also been cutbacks on margin lending (the ability to buy stocks with borrowed money).

But the pundits are rattled. Morgan Stanley analysts reckon that the market has topped out. And they're not the only ones.

So should we be getting out of China?

China is following a well-worn economic path

And it's probably healthy if it corrects a bit further. But this doesn't mark an end to the good times, or a lasting bear market.

Why not? As professional investor Rupert Foster noted in MoneyWeek magazine a couple of weeks ago, China is following a well-trodden economic pathway one where the government takes a key role in directing resources in the economy. It's one that was followed by both Japan and South Korea. And if you look back at their development, what's happening in China is not that surprising.

Japan and South Korea started off with economies driven by government-channelled investment in heavy industry and infrastructure. Same goes for China. During that period, they had their first stock market bubbles. Same happened with China in 2007.

Then they transitioned to consumer-driven economies, and in both cases, stock markets returned to their highs, and never looked back. And that's where China is now.

So while it might be a bit of a rollercoaster ride, we don't think China's bull market is over yet not by a long chalk. So if you already own Chinese stocks, hang on.

And if you don't, it's time to do a bit of homework on how you might want to get exposure when the dust settles. For more on the funds you might consider buying, see MoneyWeek magazine's cover story from a couple of weeks ago. If you're not already a subscriber, get your first four issues free here.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.