Watch China for Stock Buy Signal

Watch China for Stock Buy Signal

Put down March as an important month to watch when it comes to China.

The New York Times reported last week that the Chinese government is (again) considering levying a property tax to cool down the housing market over there.

This comes off the back of this comment made by President Xi Jinping in October: ‘Houses are built to be inhabited, not for speculation.’

Some investor commentators took that as a cue to say real estate might cop a government crackdown.

The locals might need more convincing. Here’s a snippet from the same report on a budding real estate opportunity…

Real estate fervour was on display on a recent chilly morning at an apartment  complex in the eastern city of Nanjing. Would-be buyers spent the night in tents and under quilts, lined up for a chance to buy. So many cars arrived that traffic seized up for more than a kilometre around the sales office.’

President Xi Jinping’s notion sounds great in theory. Unfortunately, parking your money in real estate is a big part of Chinese culture…

Cash could flood Chinese stocks

Presumably, that’s why the Chinese have been flirting with a property tax for years, without ever actually doing anything about it.

They’re now living with the consequences — three quarters of Chinese household assets are in property. They’re hostage to the whims of this market now.

Real estate investment/speculation is even more acute in China than here because of the closed capital account.

Chinese investors don’t have the same freedom to send their money all over the world — say into US stocks — like we do. A lot of it is trapped inside China, with nowhere to go except real estate, with much lesser allocations to gold and Chinese stocks.

However, should the Chinese government actually act on this property tax idea, then Chinese stocks could go on a tear.

If Chinese domestic investors divert their money away from property, they won’t have many other places to put it except the Chinese stock market.

There should be plenty of money to handle. The Chinese economy is firing. I read over the weekend that China is actually getting close to becoming a net importer.

Gone is the idea that the country is nothing more than a sweatshop sending out cheap exports.

Such is the wealth creation going on there that the Chinese are importing goods from all over the world as consumption drives more of the economy.

China’s old industrial base is being replaced by a technology-led business environment.

China might even supplant Silicon Valley as the premier location for innovation and development — if it hasn’t already.

Both Bloomberg and The Journal reported recently that Silicon Valley is losing appeal to Chinese tech start-ups.

They’re becoming less inclined to leave futuristic cities like Shanghai, with facial recognition, 24-hour delivery, mobile payments, and China’s global leadership in ecommerce strengthening, plus plenty of venture capital at home.

One example of the divergence happening is that in China, and not America, the economy has become almost completely cashless.

Mobile payments in China hit $9 trillion in 2016, according to a report cited in The Wall Street Journal. Even the beggars have gone digital. The US is nowhere near this adoption rate.

Alibaba and Tencent are now spoken about in the same league as Amazon and Facebook. Alibaba might even have the best artificial intelligence in the world. We’ll have a better idea on that when its next quarterly earnings come out next week.

It will also be a very handy insight into the health of the Chinese consumer.

Tech developments and wealth will continue to pour out of China — there’s no doubt about that. A part of this is going to be the ongoing disruption and innovation around blockchain.

Western financial institutions were wrestling with this in Davos last week, according to the Financial Times.

The key feature of blockchain is its decentralised nature — and potential to ‘disintermediate’ middleman functionaries, like stock exchanges, clearing houses, and foreign exchange trading houses.

Financial institutions have to embrace this change, or they’ll be made redundant. Blockchain isn’t going away. It’s only a question of who wins and who loses. The big financial firms know they can’t avoid this.

That means we can expect to see a lot of money pour into companies that can help them survive and flourish in the new environment.  Go here for more on this.


Callum Newman,

Editor, The Daily Reckoning Australia