China growth figures were out at a strong 8.9% if you ask economists since they predicted 8.7% on average, and weak if you ask the Chinese, who are eyeing further property curbs potentially, banking liquidity dry-up, and overseas fears which are the play of the day.
From the market perspective, I suppose that this was the perfect Goldilocks number: not so cold as to suggest a hard landing (called a crash in non-euphemistic English) and not warm enough to stand the cold winds of Europe. Resilient economy that needs support. Now that wasn’t such a difficult spin, was it?
In the longer term, to “sustain” this valuation, the obvious question is what comes after. Will this data be backed up by policy stimulus, and if so, what kind exactly? Interest rate falls? Required Reserve Ratio reductions? if liquidity is truly the problem, then hopefully reserve ratio reductions will hopefully alleviate this to an extent which is not normally seen outside of the west, but I personally speculate that the interest rate is a weapon too big to use at the moment, especially given the inflation levels but path downwards.
I know I sound like a broken record, but after Lunar New year I suspect we would be seeing more action out of the government, and leaving it sitting hanging over one full week of holidays seems like a big step even for an agency that seems to only work on Fridays given when their policy announcements hit the streets. Mild easing, or continued talk of it might well be in the cards (but mind you, we have had this discussion before, China does not like being predictable and they do not like to target levels, but rather rates of change of whatever they want to control). Both will send the Shanghai Composite higher, which I think would be hard to avoid save imminent Greek default. Set your alarms for the IIF meeting tomorrow…
The Shanghai Composite is trading at a 12.5 P/E (historical) which is expensive compared to Hong Kong (~9) and Singapore (~7), but fairly mild compared to Japan, Taiwan, Korea, etc. Thus, I highly suspect that the main driver at the moment will be multiples expansion, and that this will indeed push China slightly higher. It’s also been caught in a ten-month channel which took it from a high of around 3 070 to a low of around 2 150! Watch closely as there is a double bottom at the 2315 level (less than 1% above today’s closing price) for the first price action move, and then watch the falling channel line around 2400, going down at 3.5 pts/day or 18 points per week. Another test of this channel seems likely around the first week of February. Look out!