Is China’s massive bear market a buying opportunity?

Since their 2018 high, Chinese stocks have lost a third of their value. John Stepek looks at what’s behind the fall, and asks if it’s time to buy.

Chinese stocks have lost a third of their value since their highs earlier this year

One point that Donald Trump has made very clear during his time as president is that the US would prefer to give up its role as global policeman.

What's interesting is that the Federal Reserve despite the occasional disagreement with the commander-in-chief appears to have the same view on the financial side of things.

If the Fed is at all concerned about the outlook for emerging markets, it hasn't revealed it in public as yet.

And that could make China's current bear market even worse.

The most interesting thing about yesterday's Fed meeting

The US central bank gave its current view on the US economy yesterday. It wasn't a big meeting no interest-rate changes and no big shifts in the Federal Reserve's take on things. In short, the Fed reckons the US is doing fine and it looks as though interest rates are on course to rise in December again.

As John Authers notes on Bloomberg, the most notable thing about the session was what the Fed cheerfully ignored in its speech.

It said nothing about "red October" (as markets have now nicknamed last month's wobble). And it said nothing about the US dollar, or its impact on emerging markets (which was something that Janet Yellen used to pay attention to).

In short, the Fed under Jerome Powell at least so far does not feel the need to treat the markets with kid gloves. He's shaping up to be more of the "tough love" school, at best.

This is a marked shift from the past 30-odd years of US monetary policy. It's yet another sign that we are moving into a very different financial world from the one that most of us have grown up with.

The bond bull market is over. The path of least resistance for interest rates is now higher. And we now have a Fed to match that environment.

As Authers puts it, wherever the "Powell put" is, it seems it's a fair bit lower than the market has grown used to.

The US is still getting used to this idea. Markets there slipped yesterday following the post-election rebound. But overall they don't seem to know quite what to do with themselves. They still want to be bulls. They just need an excuse.

China, on the other hand, is more than willing to take any excuse to sell off. Chinese stocks fell again this morning, adding to already huge losses for this year.

China's rampant bear market

Since their 2018 high, the MSCI China index and the onshore A-share market have both lost around a third of their value. Meanwhile the currency has weakened against the US dollar, although at 6.95 yuan to the dollar, is still holding out below the 7.00 mark that is seen as being politically significant.

You might think that this is mostly to do with trade wars. It's not really: the big issue is that China has been trying to sort out its vast debt pile.

The government wants the economy to rely less on infrastructure investment and more on consumption. That's how you build a modern economy without getting stuck somewhere in the middle of the progress ladder.

Of course, this is not easy to do. If you try to put an end to inefficient lending and let dodgy projects go bust, then there's also a price to be paid in terms of slowing growth and the occasional blow-up.

And the Chinese government doesn't really want an economic slowdown because that won't be popular with the people. Also, the leadership doesn't like looking bad.

That's a pretty tricky dilemma. And the problem is that when you run a heavily centralised economy, most of the tools you have to try to tinker with the issue are blunt ones.

The latest move to try to help buoy the economy without embarking on full-blown stimulus was for the government to tell banks exactly how much they have to lend to the private sector.

At least a third of new loans from big banks are expected to go to non-state companies, reports Bloomberg. For small and medium-sized banks, it's two thirds. Currently, less than a quarter of lending is going to the private sector.

The problem is, if you set targets for lending like this (particularly when failure to meet government targets in a country like China is not a recipe for a long and happy life), then you are creating a huge incentive for yet more bad loans to be written. And it also smacks of desperation. The banking sector fell on the news.

What does it all mean? Writing in Barron's this week, former fund manager Adrian Mowat reckons that China now looks cheap and that it could be time to start looking to buy. And certainly when you see a market that's collapsed by a third from its high, you have to wonder where the opportunities are.

However, this is a nightmarish balancing act for China to pull off, and if you do decide to get any exposure to the market, I reckon you'll have to be very picky. Particularly as the Fed does not seem to be in the mood to bail out the global economy any time soon.

We'll be looking at the Chinese stockmarket in the next issue of MoneyWeek magazine, out next Friday. If you're not already a subscriber, sign up now.


I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Beware the hidden risks when investing in emerging markets
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019
Emerging markets: buy when the news is bad
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular

Investors are shunning UK stocks – but they might regret that in a year’s time
UK stockmarkets

Investors are shunning UK stocks – but they might regret that in a year’s time

There are a number of reasons why investors aren't buying UK stocks, says John Stepek. But they may want to rethink that strategy.
29 Sep 2020
Are we really in a stockmarket bubble?
US stockmarkets

Are we really in a stockmarket bubble?

The rise of “cash shell” companies, sky-high valuations – everything seems to point to a stockmarket bubble. But all may not quite be as it appears, s…
28 Sep 2020
Two commodities that could lie at the heart of the next resources bubble

Two commodities that could lie at the heart of the next resources bubble

Commodities tend to move in cycles. And if you can identify early on which ones are about to surge in demand, you can profit handsomely. Dominic Frisb…
30 Sep 2020