Over the past 2 months, the decline in Chinese shares has stopped.
After a huge fall during summer, China’s stock market is performing better and that is bringing some optimism back to the market. Perhaps, too much optimism?
In a recent article in the Wall Street Journal titled “China enters a bull market” the newspaper calls this two-month rally a bull market. With all respects to the author, Cheng Dong, describing this bounce from its lowest level as a bull market only demonstrates a complete lack of understanding of what a bull market is. Indeed, the Shanghai Composite Index already rallied 24% in July only to fall again to new lows.
Over the past three years we’ve seen many commodities bounce over 20% to later fall back to multi-year lows. Indeed, it is during a bear market when sharp rallies occur more frequently, but that doesn’t mean that we’ve entered a bull market.
Although the recent rally in Chinese shares could actually be the beginning of a new bull market, we believe it’s way to early to assume that. So far, the rally looks like a dead-cat bounce and further declines might be around the corner.
The latest economic data doesn’t suggest improvements in China’s economy, not to mention that there are questions surrounding the way China adjusts its growth figures into real terms and that its slowdown could be more pronounced than what the central government’s data shows.
In addition, commodities markets are not confirming the rally in Chinese shares. Commodity prices are linked to China’s growth. China makes up around 50% of the world’s demand for commodities and any real expansion in China’s economy should be followed by higher commodity prices. But we haven’t seen that yet.
Indeed, industrial metals were the most depressed commodity basket over the past two months, the DBB industrial metals ETF just hit a new low last week. Industrial metals are more sensitive to China’s slowing industrial capacity and the fact that prices haven’t rallied tells us that investors are not buying “China’s bull market.”
What This Means For Metal Buyers
Don’t let a two-month rally in Chinese shares blur your mind. We need further improvements to call this a new bull market. Until that happens, buyers should expect prices to stay low.