For a few decades now, the Communist Party in China has had an implicit social and political contract with the Chinese populous for decades, which goes something like:
“We will deliver economic growth and improvements in your material living standards. You will meekly do as you are told, refrain from dissent, work hard, save a huge percentage of your money, and ignore obvious corruption.”
While nearly everyone in China has benefited to some degree under this current “system,” the wheels are definitely starting to come off. Official GDP numbers are now slowing, real estate prices are falling, and inflation is quickening.
Now, I’ve made no secret that I’m decidedly bearish on China’s medium-term prospects. After my trip there back in June to conduct some good old-fashioned “boots on the ground” research, I wrote extensively about the massive overbuilding of apartments, office blocks, and all manner of infrastructure on an almost unimaginable scale.
Put simply, every year since 2005, more than 50% of China’s GDP has consisted of construction-related spending. The law of diminishing marginal returns says this simply cannot continue.
It represents a misallocation of the household sector’s hard-earned savings on a colossal scale, and I believe it will end badly. Not a day goes by that there aren’t riots and protests somewhere in China (including cyberspace) as the downtrodden man in the street reaches his froggy boiling point.
We may be skating on very thin ice here, but the weight of the evidence still supports a weak bull case for the near to intermediate term. So I’m adding buy picks on the chart pick list and adjusting trailing stops to account for the risk.
These reports are not investment advice. They are for informational purposes, for a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.