In the months following the financial crisis of 2008, all eyes turned to China. Traders around the world wondered if this government-run economy could turn the tide and spark a global economic rally.
Luckily for all of us, the answer was the affirmative.
In just four short quarters, the Chinese government injected enough fiscal and monetary stimulus into its economy to boost its gross domestic product from a low of 6.1% in the first quarter of 2009 to a high of 11.9% in the first quarter of 2010 (see Fig. 1).
Fig. 1 — Chinese GDP (source ForexFactory.com)
Unfortunately, it was a short-lived boost, and the Chinese economy has been losing steam ever since. That decline has been slowing, however, as the Chinese economy is showing signs of stabilizing, and it couldn’t be happening at a better time.
The U.S. stock market is showing signs of unease as Wall Street worries that central banks around the world — from the European Central Bank and the Bank of England to the Bank of Japan and the Federal Reserve — are going to change course and abandon their easy monetary policies. These lax monetary policies have provided the low-interest-rate fuel that has driven the S&P 500 Index higher, and if that fuel is taken away, traders wonder what might step in and take its place.
While it certainly wouldn’t be able to provide all of it, stabilization in China could provide some of that fuel.
Signs of Chinese Stabilization
After a harrowing drop in the Chinese stock market in 2015 that sparked a rapid selloff in U.S. stocks, Chinese A shares have started to stabilize (see Fig. 2).
Fig. 2 — Shanghai Class A Index (source TradingView.com)
The recovery has certainly not been as bullish as the recovery we have seen in the S&P 500 this year, but stability is important. The Chinese stock market isn’t showing any of the bubbly fervor it was exhibiting in 2015, which means that it is much less likely that the market will collapse in 2016 or 2017.
The Chinese government — via the People’s Bank of China — has also been able to bring the value of the Chinese yuan down dramatically compared to the U.S. dollar. As you can see in Fig. 3, a single CNY used to be worth 16 cents a year ago. Now one yuan is worth just under 15 cents.
Fig. 3 — Daily Chart of CNY/USD (source TradingView.com)
A one-cent difference may not seem like a big deal, but that is a 6.25% decline in the value of the CNY in one short year. That means a lot to a country that is dependent on manufacturing and exports. The weaker the CNY is, the less expensive Chinese goods become in the global marketplace and, the less expensive Chinese goods become, the more foreign consumers tend to buy.
To get a sense of just how important this decline in the value of the CNY has been, take a look at the following charts.
In Fig. 4, you can see that Chinese industrial production has finally stabilized during the last year after five years of steady declines.
Fig. 4 — Chinese Industrial Production (source ForexFactory.com)
This has resulted in Chinese companies becoming more bullish about the future. Looking at Fig. 5, you can see that the Caixin Manufacturing Purchasing Managers Index was finally able to move back above 50 last month for the first time in 17 months.
Fig. 5 — Caixin Manufacturing PMI (source ForexFactory.com)
The Caixin Manufacturing PMI is a diffusion index, which means that any number greater than 50 indicates expansion in the manufacturing sector, while any number less than 50 indicates contraction. Seeing this number rise above 50 is a good sign for the future because purchasing managers are always looking ahead to make sure they have enough employees and raw materials to meet demand for future orders.
Bottom Line on China’s Impact
It’s no secret that traders are getting nervous that the bullish run on Wall Street may be coming to an end. However, the perma-bear prognosticating “Henny Pennies” who are warning of an imminent collapse of the U.S. stock market may be overselling things a bit much.
A shift in global monetary policy will certainly have an impact on U.S. stocks, but there are areas of stability — like China — that will likely dampen any downturn and may even provide a few bullish trading opportunities.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
