So why are the Chinese so bullish on China?
Jittery investors on Wall Street are running for the fire exits this week in a high state of anxiety about European debt, especially Greek and Portuguese obligations. We often hear that investments in U.S. companies or Chinese ADRs have nothing to do with Greece or Portugal, and on the face of it, that is true enough. But the Standard and Poor’s Index and even more so, the China ADR Index, both tell us a lot about investors’ global appetite for risk.
When the spiraling chaos in Greece raises investors’ risk aversion, world markets feel the effects. The same thing happened when the Dubai bubble burst and investors worldwide caught a case of nerves, dumping many of their stock holdings whether or not they were directly tied to the Middle East.
But keep in mind, the latest numbers from China add to the case that we have been making about the Chinese economy. Although there are economic areas of real concern such as real estate which the government is trying to deflate, in general growth has been extremely strong. An 11.9% annualized growth rate during the first quarter is remarkable. But there are always those who distrust numbers from Beijing.
So why are the Chinese so bullish on China? In short, because the evidence of robust economic activity is right before their eyes, and not just in the towering buildings shooting up around them.
Impressive numbers don’t come only from Beijing. China’s financial capital, Shanghai, announced that retail sales jumped 22 percent during the five-day May Day holiday – the highest growth rate since 2005. This year’s shopping boom was 7.9 percentage points higher than during the May Day holiday last year and not solely because of the Shanghai World Expo.
Gold and jewelry were the most popular products in Shanghai, with sales soaring 53.5 percent. Luxury sales in the ritzy Luwan district of Shanghai surged 19 percent from a year ago after the world's top brands, including Louis Vuitton, Coach and Ermenegildo Zegna, opened their flagship stores there. Obviously the people of Shanghai are feeling flush.
Don’t trust Chinese numbers? Shanghai General Motors reports April vehicle sales jumped 62 percent to 89,562 units, with Buicks making up half of that extraordinary number. Chevy and Cadillac sales doubled.
The Chinese are also gambling more in Macau than Americans are in Las Vegas. Macau's gaming sector raked in $1.76 billion in April, the highest monthly revenue harvest there on record.
While investors in New York watched stocks tumble, The Shanghai Index recorded a small gain of 0.8 percent on Wednesday.
Although China remains bullish on most fronts, foreign investors remain nervous. At the China Stock Digest we sold off two investments from our model portfolio, including American Dairy (ADY), not because of worry about their fundamentals but because global investor sentiment had turned the trend against small caps worldwide.
By the same token, foreign investors are short selling China’s stocks through a yuan-denominated exchange-traded fund at the highest rate in more than two years. Data from Bloomberg shows that the ratio of short selling to total turnover on the iShares FTSE/Xinhua A50 China Index ETF (HKG: 2823) has reached 39 percent.
It may not be fair to investors that chaos in one part of the world affects investments in another but that is how globalized markets are working in these unsettled times. The top priority for investors is to hold the most profitable, best value stocks in anticipation of the next trend in the business cycle.