The trading week started with a strong performance of the Chinese stock market. Effectively, every retail trader rushed to buy Chinese stocks, as the government “suggested” over the weekend that a strong equity market helps economic performance.
Indeed it does. Economic studies showed that stock market performance is a leading indicator of economic growth. Higher stock market prices increase consumption due to the wealth effect – investors perceive their wealth increasing together with the value of their portfolio and are more willing to spend in the present then to postpone spending. This is especially true in the case of durable goods or other expensive goods.
What Next for the Chinese Stocks?
So big was the news impact that Google searches increased dramatically on terms like “how to open an online trading account.” Moreover, many Chinese trading apps experienced outages due to the increased number of users.
In a way, this is an old story. Only recently, the United States saw similar behavior from retail traders jumping on Robinhood to open trading accounts for buying fractional shares in US companies. The result? Parabolic performance for companies like Amazon, Tesla, Microsoft, and alike, while the rest of the S&P500 underperforms by a mile.
Extrapolating, one can expect similar performance from the Chinese stock market. Some companies will remain overbought for a long time, some under will underperform – but the amount of money pouring in the stock market should help economic performance.
A quick comparison of the three main stock markets in the world (China, EU, and the US), reveals something interesting. Already the Chinese stock market outperforms the US and the EU in 2020. Truth be said, they had a jump-start as by the time the coronavirus created a shock in the West, China already had the outbreak under control.
However, the timing cannot be more interesting. European stocks may not be interesting due to an aging population, high taxes, lack of technology exposure, and so on. US stocks seem to be driven by the FANG group moves – add to this Tesla and Microsoft.
Now that the Chinese state officially encourages retail traders to invest in the stock market, the gap between the three should increase further. One should not be surprised to see this being only the first step of a detailed plan by the Chinese authorities to preserve and create wealth.
After all, coronavirus ended globalization as we know it, and the world’s superpowers need to find a different way to grow.