The market’s sharp reaction to recent Iran headlines could have been much worse had the news been about China.
Chinese stocks were already on a five-week winning streak. Then the government cut reserve requirements.
The move is expected to free up nearly $115 billion for new lending. Chinese banks now need to only hold 12.5 cents for each dollar they lend. It’s the eighth such cut in the last two years. The biggest U.S. banks hold 10 cents as a reserve, and smaller banks even less.
This initially sent all Chinese stocks higher, especially those traded on U.S. markets. Alibaba (NYSE:BABA) rose to nearly $220 per share, but opened for trade Jan. 6 just above $216. Rival JD.Com (NASDAQ:JD) approached $38 per share, and opened at $36.78.
Adult in the Room
Despite its continuing oppression of Hong Kong and native Uighurs, China is acting like the adult in the room on the world stage.
China is maintaining relations with both sides in the U.S.-Iran fight, urging calm. Cynics note this is because China is far more dependent upon Middle East oil than the United States, which has ramped up production of oil thanks to fracking old fields. China, and India, are becoming the “swing buyers” in oil markets, with prices often reacting more to their economic data than any other factor. The goal is to make prices less volatile and more predictable.
Despite rising U.S. fears of China’s military, a delegation is still expected to leave China in a week to sign a new trade deal. President Donald Trump has said he will sign the new deal Jan. 15. This could allow China to loosen monetary policy further. The yuan recently went back to trading at under 7 to the U.S. dollar, after having traded above that figure since August.
Bubble Ahead?
China’s easy monetary policy is raising concerns of a stock market bubble in its $45 trillion financial system. Some analysts are warning of a property bubble, similar to the one that produced Japan’s “lost decades” after 1987. The Chinese economic threat, some analysts say, is a paper tiger.
That’s because, like Japan three decades ago, China is rapidly aging. The median age there will soon rise above that of the United States.
China is said to be rapidly urbanizing, but one-third of those classed as being in “urban” areas may actually be living rural lives. That means the country may be less developed than many people think.
Playing China
For 2020, analysts are looking beyond the obvious names for technology growth.
Instead of recommending Alibaba they’re recommending Baidu (NASDAQ:BIDU), the search engine company. They’re not recommending JD.Com, but they’re recommending Vipshop Holdings (NYSE:VIPS), a discounter. Instead of recommending Tencent Holdings (OTCMKTS:TCEHY) they’re recommending NetEase (NASDAQ:NTES), a provider of back-end services.
These picks could be just a recognition that the Chinese market is more sophisticated than before. But they’re also indications that the market leaders may be overpriced. When people start looking for secondary picks, it’s often the sign of a market top.
The Bottom Line
China and the U.S. are locked in an unbreakable economic embrace.
No one is going to win the trade war, because the two economies are so interdependent. Leaders on both sides are more concerned with their short-term future than the long term. This is heightening fears that something — the currency, the stock market, the property market — is going to bust.
If that happens, however, U.S. equities will bust as well. Like it or not, we’ll all go together when we go.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.
