Not So Fast on China

 | Jan 23, 2014 | 6:58 AM EST  | Comments
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Stock quotes in this article:

FXI

Rather than discuss the still-so-dull U.S. stock market that has gone nowhere in almost a month, I thought I would check in on the Chinese stock market. I can see the eye rolling all the way over here. "China?" you say. "She has got to be kidding."

Yet let's go back a few months ago to November. Just after the Chinese announced a change to their one child policy everyone waxed enthusiastically about how great this would be and how it was a turning point for China. There were all sorts of estimations of how  much this would boost the Chinese economy. Bullish commentary abounded.

At the time I was a dissenter. I wrote that life in China was not the same as life in these United States. Having lived in Shanghai for four years I had learned a few things about the Chinese and their lifestyles.

I noted that unlike the U.S., taxes don't pay for public school in China. You want your child to go to school in China, you pay for it. Unlike the U.S., where a small apartment is perhaps 400 square feet (and rarely would a family live in an apartment that small) in a city such as Shanghai the average family lives in an apartment that might be about 50 square meters (about 500 square feet).

Consider then that folks have gotten used to spending their money on one child and buying apartments that were just large enough for three people. Will they be that quick to have a second child? Besides, those who can afford it were already having more than one child and simply paying a fine. There was already a law in place that folks in the rural areas could have more than one child, especially if each parent was a single child. This is the type of thing that will take a long time before we notice any changes economically. And aside from that, the chart of the Shanghai Composite did not look like it would do more than pop and drop. If you look at the chart of the iShares China Large-Cap (FXI), an ETF to be long the Shanghai Composite, you can see the chart essentially popped and dropped.

But now look at it. There is no imminent news as there was a few months ago. Chinese New Year arrives in early February and the country will essentially shut down for a week. But notice that FXI bounced off a trendline (A). It has plenty of resistance overhead as it gets to the $37 area (and above) but what if it rallies to $38-ish and then pulls back to retest that second down trend line around $37? Isn't it possible that the chart begins to shape up much like I have drawn in (in grey)?

And where are all those bulls from a few months ago? Silent for now. And at least this time you are not chasing the news.

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