The growing bullishness for Chinese stocks is in sharp contrast to the gloom over the recent economic data. Investors betting that the credit taps are about to fly open should read this from Caixin (subscription).
What's happening: Axios' Dion Rabouin writes that while U.S. trade negotiators continue to push for a trade deal with China that includes "significant structural changes" to its economic model, investors are putting the trade war behind them, pushing forward into Chinese assets and being rewarded handsomely.
- Onshore Chinese A shares have nearly doubled the performance of the S&P 500 so far this year, rising more than 21%.
Why it matters: There's a growing chorus of investors who don't see this as a short-term theme, but as the beginning of a new cycle where the growth dynamics in countries like China, India and others in Asia, Africa and Latin America drive not just the lion's share of the world's gross domestic product but also its market performance.
- "Going forward, I see the U.S. getting something like 4% or 5% annual returns, while EM returns 8% or 9%," Lance Humphrey, a portfolio manager on USAA's global multi-asset team, tells Axios.
Between the lines: China, specifically, is making major strides in refining its economy, but not because of the trade war.
- Exports as a percentage of Chinese GDP have already shrunk from 36% in 2008 to just 18% today, says Henry McVey, head of global macro and asset allocation at investment firm KKR. And the Chinese economy is still growing at a 6% clip, turning to services and other domestic industries.
- "Maybe more importantly, we believe that exports as a percentage of GDP could be headed into the low double digit range or below that of the U.S. over the next five to seven years — almost irrespective of which way the trade negotiations turn out."
- "China made a conscious decision to internalize much of its end demand following the Global Financial Crisis — long before the election of President Donald J. Trump."
And that's just the tip of the iceberg, global strategists at Wells Fargo Investment Institute say. They expect to see Chinese urbanization rise towards 80%, moving some 400 million people from rural to urban areas, and buffeting an already growing middle class.
My thought bubble: There is an ongoing debate about how much the government will stimulate the economy.
- I do not think we will see anything like what we saw in 2008, but given the state of the economy, the risks the Chinese Communist Party itself has articulated, and the especially sensitive year given the big anniversaries, I am more than comfortable betting that the party will do whatever it needs to minimize economic risks this year.
- That point may seem obvious but I am always surprised by how many economic analyses of China leave out the politics.
The bottom line: The politics are in command, and will be even more so this year.