China Stocks Bear Market Crash, Are We Near the Bottom Yet?
Stock-Markets / Chinese Stock Market Aug 27, 2015 - 02:05 AM GMTBy: Nadeem_Walayat
China's stock market meltdown that began Mid June from a SSEC trading high of 5,200 had paused under the weight of heavy the Chinese government interventions that in total amount to over $400 billion thrown at the stock market in an attempt to bring the selling to a halt. However, all of that literally went up in smoke along with one of China's largest ports which literally exploded revealing behind the truth of what the Chinese economy is, a mere mirage of the picture of strength and stability that communist party propaganda has been successfully propagating.
In fact the Onion did a good humorous job of catching the reality of China:
Shoddy Chinese-Made Stock Market Collapses
SHANGHAI—Proving to be just as flimsy and precarious as many observers had previously warned, the Chinese-made Shanghai Composite index completely collapsed Monday, sources confirmed. “Sure, it looked fine from the outside, but anybody who saw it up close knew that it was of such poor quality that it wasn’t built to last,” said Allen Sigman of the London School of Economics, adding that the stock market, which he described as a crude knockoff of Western versions, was practically slapped together overnight and featured countless obvious structural weak points. “They pretty much ignored regulations, and inspections were a joke. The only surprise is that it didn’t fall apart sooner.” Sigman added that he just hopes there weren’t too many people who were hurt in the disaster.
To date the chinese emperor has shown himself to have no clothes, as the decline once more resumed taking the SSEC index to a new bear market closing low of 2927 despite a panic interest rate cut and relaxation of bank reserve ratios and some $400 billion thrown at the stock market to date, and not forgetting the currency devaluations which apparently rather than supporting the stock market looks like having sparked the current wave lower. Though China does still have huge reserves of an estimated $3.5 trillion, so if it chose to (which looks likely) then the Chinese government could easily throw another $400 billion dollars at the stock market.
China Stock Market Long-term Outlook
The fundamental flaws at the heart of China that act as a cap on how far China could economically progress towards rivaling the West is that its economy and people exist within a totalitarian system that lacks key requirements necessary to replicate the level of development of the West, namely freedom of thought and expression where instead China's communist system demands obedience and conformity without protest from its people and tends to crack down hard on all who fail to conform to its rigid system of absolute control.
The China economic development cap is nothing new for I have warned of it for well over 5 years now as illustrated by my January 2010 Inflation Mega-trend ebook (FREE DOWNLOAD). That warned that in all probability China would hit an economic brick wall at approx 50% of typical western GDP per capita as excerpted below:
The Inflation Mega-trend Ebook - Jan 2010 (FREE DOWNLOAD).
The Chinese fast growing economy with consistent annual growth rates of 10% per annum is on course towards becoming the worlds dominant economy over the next 10 - 15 years, with GDP per capita at just $6,000, China's economy retains the capacity to keep doubling in size several more times before growth rates seriously start to diminish, therefore despite the growth to date the economy still has a long way to go towards even reaching half the per capita income of that of the western economies.
China Intellectual Growth Problems
One possible fly in the ointment is future political stability, as so far the 'communist' in all but name one party state in China has been able to keep its peoples eyes focused on economic prosperity and not to stray into political activism, whether at some point in time a crunch point comes when a more wealthy educated people demand more openness and freedom of expression.
Another problem that follows on from the authoritarian government structure is that China's access to the information age is very limited, i.e. web searches are usually blocked and user access to the internet closely monitored. This implies that China is unlikely to replicate the global growth in the production of consumer durable goods on to the internet technologies, which will still largely remain something in the hands of the democratic relatively free English speaking world as long as they do not erode their own countries freedoms by means of the states misapplication of technology to prevent free thought.
Back at the start of 2010 Chinese GDP per capita was just $6k, 15% of the likes of the UK on $39k per capita. So despite communist party corruption and incompetence China still had plenty of years of growth ahead of it. Whilst today China's GDP per capita has risen to $10.5k, 26% of the UK's $41k. Which suggests that on face value China's economy is only about half way there, which means whilst China's economy is slowing today. However the slowdown will be temporary as the Chinese economy looks set to double in size once more before it hits a systemic brick wall when the real economic and social fire works will begin.
Again it should not be forgotten that the primary reason why the people of China put up with being slaves to the communist system is because of strong economic growth that delivers prosperity. Hence why the Chinese government is bending over backwards to support the stock market and economy for if they fail then so will the Chinese communist party system, thus potentially sparking a violent revolution, which is why what China does in terms of stimulus can be several orders of magnitude greater than which Western nations would entertain. In fact I would conclude that the Chinese communist party is permanently in a state of paranoia about a revolution that would spark from the economy in trouble i.e. rising unemployment / falling real wages.
Therefore this implies that today's China stock market sell off is a long-term buying opportunity. Where by a decade from now the SSEC should have traded in that time at TRIPLE its last close of 2927. So despite short-term pain on a long-term basis the China story is far from over! The alternative is that this is the start of the end of the Chinese Communist party (low probability).
China Stock Market Bottom?
In terms of my current expectations for the Chinese stock market then I refer to my in-depth analysis of mid July that as of SSEC 3877 forecast a resumption of the bear market to a target spike low of SSEC 2,500:
13 Jul 2015 - China Crash, Greece Collapse, Harbingers of Stock Market Apocalypse Forecast 2015?
China Stock Market Forecast Conclusion
Pulling all of the threads together implies that the current rally is corrective, following which the SSEC bear market looks set to resume with a vengeance with the SSEC targeting 2,500! Which is quite some distance from its last close of 3877.
As for what happens after SSEC 2,500 is less clear, I am leaning towards probability favouring a dip to 2,500 being a panic spike that soon reverses higher and resolves to base building between 3,000 and 3,500 for the remainder of 2015. However, if the spike low rally fails then that could yet trigger FURTHER panic that plunges the SSEC into a deeper trading range of 2,000 to 2,500 for several years.
So the bottom line is that there is far worse to come for China investors. In fact the china bear markets only about half done!
Since when the SSEC has fallen by nearly 1000 points or 25% and is now within touching distance of the target low from which the SSEC could carve out a bottom. Recent trading volatility suggests that when the low comes its going to be pretty quick (as originally forecast) i.e. the final spike low could occur over just 1 or 2 trading days rather than a laboured bottom forming process, with the SSEC likely quickly rallying to back over 3,000 (+20%) and unlikely to revisit the SSEC final low again.
The immediate technical picture of a deeply oversold, down 23% in just 5 day, and the elliott wave (A-B-C) pattern implying an imminent bounce before the SSEC final spike low. So the SSEC should trade higher over the next few days before likely spiking lower once more.
The bottom line is that the China stock market IS NEAR a bottom, and that it could even all be done and dusted within a week or so!
For what China means for western stock markets such as the Dow then ensure you are subscribed to my always free newsletter for my next in-depth analysis due to be completed this week that will seek to update my existing long standing trend forecast for 2015 as excerpted below.
In the meantime check out Robert Prechter's view on the Pandemonium in the Stock Market in his timely FREE Report.
Existing Forecast
03 Feb 2015 - Dow Stock Market Trend Forecast 2015 by Nadeem Walayat
The Dow resolves to a bullish Elliott Wave pattern i.e. implies that the Dow should now embark on a trend to a new all time high, probably before the end of March! So contrary to much of the building picture so far. Thereafter suggests a summer ABC correction back down to around 17,500 to coincide with "Sell in May and Go Away".
Dow Stock Market Forecast 2015 Conclusion
My final conclusion is for the Dow to spend the first half of 2015 in a wide volatile trading range as it continues to unwind the 2014 bull run and sets the scene for the next series of bull runs to new all time highs. I expect the Dow to have started its bull run by early August off of an summer low and then continue into the end of the year, punctuated by an October correction low. I further expect the Dow to be trading well above 19,000 during December 2015 and probably above 19,500, before closing at around Dow 19,150 for a 7.5% gain for the year as illustrated by the following trend forecast graph for 2015.
The bottom line is don't be frightened by first half weakness, yes it may look grim if we see the Dow trading under 16k, but all it would represent is a deeper buying opportunity before the market resolves to above Dow 19k.
Ensure you are subscribed to my always free newsletter for my next in-depth analysis and concluding detailed trend forecasts that include the following planned newsletters -
- Stocks Bull Market Over?
- US Dollar Trend Forecast Update 2015
- Crude Oil Price Trend Forecast
- Islam 3.0
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By Nadeem Walayat
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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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