(By Mike Burnick) China has been one of the world's worst performing stock markets in 2012, down 14 percent from its March high. Persistent worries about the health of China's economy have dragged stocks lower.
But over the past month, stocks in Shanghai have perked up a bit. And recent upbeat economic data has many investors asking if growth in China may finally be rebounding after a seven-quarter slowdown.
The answer to this question could determine if emerging markets in general — and especially in Asia — may enjoy a reversal of fortune leading global stocks higher once again.
One thing is for sure: Investor sentiment toward China has been pervasive in recent months.
Confidence Is Returning!
As quarterly GDP growth fell steadily for the past seven straight quarters, confidence turned sour. And investors pulled capital out of China and U.S.-listed ETFs and mutual funds that invest in China.
The financial media went from debating whether China would experience a hard- or soft-landing … to predictions of an imminent crash-landing.
China's official economic data has always been considered suspect. As if U.S. data, often subjected to sizeable revisions after-the-fact, are any better. That said recent data out of China for September turned decidedly more upbeat:
• September retail sales expanded at a 13.2 percent clip — the strongest pace this year — indicating Chinese consumers are spending …
• Disposable income for China's city dwellers is growing nearly 10 percent. And rural disposable income jumped more than 12 percent so far this year …
• Fixed asset investment, a key indicator of overall capital investment, surged 20.2 percent year-over-year in September — to the highest level since October 2011!
Also, September industrial production grew at a 9.2 percent pace, while exports were up 9.9 percent, well ahead of estimates. Meanwhile, strong growth in capital investment is being led by a pickup in domestic infrastructure projects like highway, seaport, rail, and airport investments.
These are key elements of Beijing's economic stimulus announced earlier this year as leaders attempt to shift the focus of China's economy away from an export-led growth model to focus more on domestic consumption.
But it isn't just the government providing growth. Capital spending by Chinese private sector firms has risen faster than state-owned enterprises for 30 of the past 31 months!
And consumption growth is likely to pick-up even more in the months ahead, not only because disposable incomes are rising at a fast pace, but also because inflation remains subdued.
Follow the Money
China's consumer price index moderated to 1.9 percent in September down from 2.2 percent in August. This gives the People's Bank of China more room to maneuver in further reducing interest rates and lowering bank reserve requirements to stimulate more lending growth.
In fact, China's money supply growth has risen sharply this year, expanding at a 14.8 percent clip year-over-year in September, up from 12.4 percent at the end of January 2012. That's a very bullish sign given the high correlation between money supply growth and Chinese stock prices.
And following several months of outflows there are signs that money is flowing back into China again …
What really caught my eye was a report that the Hong Kong Monetary Authority was forced to intervene in foreign-exchange markets this week for a second time to prevent the HK dollar from appreciating against the U.S. dollar.
After another round of money-printing by the Fed, European Central Bank, and Bank of Japan, investment funds appear to be flowing into Hong Kong at a rapid pace, given its status as the main investment gateway into China. That puts upward pressure on the HK dollar which is pegged in a narrow range to the buck.
This is important because it's the first intervention since 2009 … the first time since the financial crisis that capital flows into China have rebounded to such a significant level.
Click the chart for a larger view.
I'm a true believer in following the money in global markets. Tracking block money flows into and out of markets, ETFs, and individual stocks can provide important clues about where the big money is moving to take advantage of investment opportunities.
Emerging market equity funds have posted six straight weeks of capital inflows through the week ended October 17, bringing inflows to more than $21 billion year to date. And China equity fund inflows recently hit a seven-week high.
I track similar money flows into ETFs using Bloomberg market data. And sure enough I noticed significant flows into China-related funds over the past several months including:
• iShares FTSE China 25 Index ETF (FXI), with $136.2 million inflows …
• iShares MSCI Hong Kong Index ETF (EWH), with inflows of $82.3 million, and …
• Morgan Stanley China A Share Fund (CAF) with a $3.7 million inflow!
This sudden reversal of money flows isn't limited to China either, or just to these funds. Several others that track China and other emerging markets are seeing strong capital inflows too, which makes perfect sense when you think about it.
China is the world's largest consumer of many commodities these days … everything from aluminum to zinc. So a pickup in China's growth should mean better prospects ahead for markets like Australia, Canada, Brazil, and Chile.
Meanwhile, about 80 percent of China's imports come from Japan, South Korea, and Taiwan, so stronger Chinese domestic growth and export growth should benefit these markets as well.
Bottom line: It may be premature to call a bottom in the Chinese stock market. But a sustained turnaround in China's economy should lead to stronger performance in many other global markets too.
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