Chinese Stocks Could Benefit from US Economic Weakness

The Chinese stock market could see new investment flows as the US economy struggles.

CH50 – Daily Chart

CH50 – Daily Chart

The CH50 index is moving to test a key level at 13,300, which could open the door to a substantial advance. The first target outside that would be up to 13,500 in the CH50, and the January highs were seen at 14,400 for Chinese stocks. 

The US economic picture has worsened recently with a revision lower for GDP and weak manufacturing in the country. In a final reading last week, GDP growth was revised to 2.6% from 2.7%. That was followed by yesterday’s manufacturing numbers which showed a contraction in all subcomponents of the index.

Weak US Growth Could Drive A Pivot To Chinese Companies

There have also been continued warnings of a recession from influential US investors before yesterday’s oil price surge, driven by the OPEC+ production cut

There have been broader signs of an economic recovery in China, and the Alibaba restructuring has eased fears of a regulatory crackdown. The latest data highlighted a substantial advance in Chinese services activity in March, with earlier releases hinting that consumer spending, industrial output, and investment all rose in the first two months. 

The latest non-manufacturing Purchasing Managers’ Index (PMI) in China jumped to 58.2 in March from 56.3 in February, the highest since 2011, according to the National Bureau of Statistics (NBS). The services sector is responsible for around 50% of the country’s GDP and 50% of job creation. 

The continued outperformance in China could see investors consider a pivot outside the US market, with Chinese authorities targeting 5% growth this year and corporate profits benefiting. In the United States, it is a different story. Veteran investor David Rosenberg said after the GDP downgrade: 

“No recession? Well, there sure is one in corporate profits, with today’s revised Q4 GDP report showing that pre-tax earnings collapsed at an -18% annual rate for the second straight quarter and contracting on a YoY basis for the first time since 2020 Q2”.

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