I posted an article a few days ago entitled “China – better days ahead?” and concluded as follows: “Will China’s command economy come to the Western world’s rescue? Time will tell, but there are rays of light, not least of which is a bullish-looking Chinese stock market.”

A short note from Jim O’Neil, Head of Global Economic Research of Goldman Sachs, subsequently arrived, saying: “Can China save the world? Not on their own is the simple answer, but they might have a good shot at it. It is increasingly clear to me, that China is at least ‘coping’ with the strains of this crisis and, indeed, looks to me as though they are through the worst.

Last week’s rise in the official PMI and another huge credit expansion for February should make a number of people question their bearishness about China. If you add on the clear signs of some additional policy stimulus, and the huge easing in Chinese financial conditions, it continues to seem highly likely to me that in the second half of this year, China will be growing above 8% again.”

Although a mild pull-back of Chinese stocks occurred over the past few days in sympathy with global markets, the uptrend remains intact. Since the announcement of the first Chinese fiscal stimulus on November 10, the Shanghai Composite Index has outperformed the S&P 500 Index by 67%.This is illustrated by the rising trend of the red line in the graph below. Also of interest is the close historical correlation between the relative performance of the Shanghai Index versus the S&P 500 Index and the Baltic Dry Index (measuring freight rates of iron ore and bulk goods).


Source: Plexus Asset Management (based on data from I-Net Bridge).

The graph below, courtesy of Michael Pento, chief economist of Delta Global Advisors, argues that inflation expectations might be putting a floor under commodity prices, providing a credible explanation of why the Baltic Dry Index appears to be bottoming out.


Source: Bloomberg, March 5, 2009.

A few exchange-traded funds (ETFs) are available to investors wishing to obtain exposure to China. The two better-known funds are iShares FTSE/Xinhua China 25 Index (FXI) and SPDR S&P China (GXC). Another option is to obtain Chinese exposure indirectly through PowerShares Golden Dragon Halter USX China (PGJ), an ETF investing in US-listed companies deriving the majority of their revenue from China. A short description of these ETFs is provided by Tom Lydon in a Green Faucet blog post.

Wall Street’s leash may continue to negatively impact global markets for a while longer, but I will be surprised if China is not among the leaders in the next sustained rally.

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