China’s back in a bull market – here’s why you should get on board

China's benchmark index, the Shanghai Composite, is back in bull market territory. John Stepek looks at what's next for investors in Chinese stocks.


Time to smile China's back in bull market territory

China's back in a bull market.

Yep, you heard that right.

The country that inspired this summer's market panic has now rallied by more than 20% since its August low point.

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We're long-term China bulls so I can't say we're disappointed. So what's next?

China's growth is nowhere near 7% but that doesn't matter

That bounce of 20% means it's back in a technical bull' market (that 20% is a completely arbitrary line in the sand by the way, in case you're wondering).

Following all the China is doomed' headlines of recent months, there's been a scrabble of explanations for the sudden recovery.

The authorities have been trying to reassure everyone that they're not completely useless by cutting interest rates and re-dedicating themselves to a 7% growth target for the year, notes the FT.

This sort of "things are getting better, it must be because the government has everything in hand" thinking is quite telling. It shows how well trained we've all become.

The reality is that China's current GDP growth is nowhere near 7% and that particular number is very much a headline fiction an aspiration and a figurehead, rather than anything approaching a reality. It's not even something China's authorities try to hide particularly.

What matters more is the direction of travel. As Capital Economics whose own China indicator suggests GDP is a lot lower points out, surveys of economic activity are "starting to turn the corner". And "other hard numbers are moderately encouraging growth has stabilised, albeit after a sharp slowdown earlier in the year."

Meanwhile, the stock market has blown off a lot of steam. Outstanding margin debt (people borrowing money to punt on the market, basically) has fallen by more than half since its peak.

China is also loosening monetary policy a bit, but at the same time, it's not embarked on a full-scale devaluation of the renminbi, which threatened to spill a wave of deflation across the developed world. In fact, the currency has strengthened in recent weeks.

In short, it's not all about the authorities talking a good game and steadying the ship' instead there are real, practical reasons why the market fell, and why it's now recovering.

On the one hand, you had an overheated market that needed to correct, and on the other, you have a situation where deteriorating fundamentals have turned a corner and are starting to improve.

The best times for China lie ahead

In the early summer, Rupert spelled out the long-term bull case for China, but also noted that he expected a correction of around 20-30% before the summer was out, which would provide a nice buying opportunity.

So far it's turned out pretty much to script. Rupert pinged me an email last night, updating us on his views. Here's Rupert:

"I think what's happened over the summer very much supports my case and undermines that of the perma bears. China is undoubtedly going through lots of change some good and some bad and the authorities are capable of mis-managing the situation, but the overall trends are incredibly positive and most Western observers and circumspect on the outlook at best."

Importantly, the property market "continues to recover. Volumes are now up this year by 30% year-on-year with average prices up 3% in leading cities with national inventories having fallen from around 17 months to around ten months". That'll help with consumer sentiment and also help to allay fears about credit quality.

Keeping it short and sweet, the long-term bull case for China is very much intact and this turnaround is based on solid foundations.

So stick with it and if you haven't bought in already, you should. We'll have more from Rupert in MoneyWeek later this month, and we'll be discussing ways to get exposure to China.

If you haven't already subscribed, do it today our 15th anniversary issue is out tomorrow and it's a good starting point to get an overview of how we see things panning out over the long term. I've also taken a look back at some of our biggest calls over the last 15 years the good, the bad and the (hopefully not too) ugly.

And if you sign up now, you'll also be getting in on our unconventional income masterclass which, if you're new to MoneyWeek, will almost certainly introduce you to a whole series of investment options that you've never heard of, let alone considered putting in your portfolio.

Here's where you can find out more.

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.