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"It’s An Ominous Sign": Trader Reveals The "Nightmare Facing China's Leaders"

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With the market's attention focused on how the China-US trade wars impact the US stock market, many have forgotten to check in on China's markets. And it is here that Bloomberg commentator Kyoungwha Kim notes that things are going from bad to worse, as despite the recent spate of good economic news, the local market just can't rally on good news, an indication of the "nightmare facing China's leaders."

The reason: Trump may have accidentally stumbled on China's Achilles heal:

... the Shanghai Composite has failed to track the recent bounce in the S&P 500. The selloff in Chinese stocks has deepened since Xi Jinping’s speech in Boao to open up the world’s second-largest economy, increase imports and protect intellectual property rights.

The case of ZTE being banned from buying American tech products revealed the hurdles for the "Made in China 2025" strategy that’s supposed to upgrade the economy from a manufacturer of quantity to one of technology-driven quality.

Kim's full thoughts in the latest BBG Macro View:

Chinese Stocks’ Blues Show Nightmare Facing Leaders

It’s an ominous sign when a market can’t rally on good news. And that’s exactly what’s happened to Chinese stocks recently.

The first quarter’s strong growth has done nothing for mainland equities. Even a surprise large reduction in banks’ reserve requirement ratios only prompted an underwhelming reaction.

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After moving in tandem in early 2018, the Shanghai Composite has failed to track the recent bounce in the S&P 500. The selloff in Chinese stocks has deepened since Xi Jinping’s speech in Boao to open up the world’s second-largest economy, increase imports and protect intellectual property rights.

The case of ZTE being banned from buying American tech products revealed the hurdles for the "Made in China 2025" strategy that’s supposed to upgrade the economy from a manufacturer of quantity to one of technology-driven quality.

Chinese consumption is growing but not by enough to take up the slack from dwindling exports if tech industries are going to sag while "old economy" manufacturers continue to cut investment amid ongoing supply- side reform.

Pessimism stems from a government stuck between a rock and a hard place. China can follow Japan’s example from decades ago by bolstering property investment and adopting other stimulative policies and somehow hope to avoid the latters 1990s collapse. Or, it can endure a low-growth period of reform in order to avert financial market bubbles.

The Shanghai Composite is already 13% below January’s two-year high. One has to wonder where the next buyer will come from if the government fails to convince investors that it knows the optimal path.

 

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