Last year was a dismal year for Chinese stocks. The popular FTSE/Xinhua China 25 Index of blue chips fell nearly 18%. This year it has already gained 7.9%, and I think Chinese stocks will shine in 2012. Readers may remember that a year ago I wasn’t very bullish. Now I am. China’s stars are in alignment right now. China frequently confounds stock market prognosticators because it has a penchant for straying markedly from other broad global indexes year-by-year over the decades—even from emerging markets. It’s hit or miss.
Nevertheless, I think I have discovered a neat way to forecast Chinese stock market cycles. China’s stock market is inextricably tied to politics. China’s powerful Communist Party leadership has a cultural history of trying to depress the economy (and hence stocks) in varying ways two years before elections, which occur every five years. Then they gun it as the election approaches.
Over the last 20 years China’s GDP growth has been relatively weakest in the two calendar years prior to the National Congress, or election. Despite the rhetoric, growth accelerates during an election year (2012) and the year after. So China is priming the pumps of its economy, and the ripple effect will be felt by stocks.
Bear in mind that China is no real democracy. It’s a rigged one-party system with some internal competition. Control comes from the top. The “election” is largely for show.
In 2010 and 2011 monetary growth imploded, fiscal stimulus declined, taxes were kept on high and China’s growth rate slowed. Scary but false stories of overbuilding were leaked from inside the government.