China’s local stock market has fallen for four consecutive weeks. Investors are spooked.
And for good reason…
China has been cracking down on speculation and financial leverage. And that has caused turbulence in the market. As Bloomberg reported over the weekend…
The [Chinese government’s] tightening campaign has erased at least $453 billion from the value of Chinese stocks and bonds since mid-April… Sales of asset-management products by lenders and trust companies have plunged by more than 30%, while domestic real estate transactions have slowed.
This crackdown might sound bad for the markets at first… But the important thing you need to understand is, China is reining in what needs to be reined in…
[ad#Google Adsense 336×280-IA]China’s credit system expanded “too recklessly and too quickly,” hedge-fund manager Kyle Bass told Bloomberg last week.
Bass is betting on a Chinese credit crisis. One of his big concerns is the size of China’s “wealth management products” (WMP) industry. WMPs offer higher yields… But they are not part of the official banking system. Instead, they are part of China’s lightly-regulated “shadow banking” sector.
Huge amounts of cash have flowed into WMPs from Chinese investors. But they encourage too much leverage and reduce transparency.
China wants to move investor money out of the shadow banking system and into the proper banking system. The government has taken decisive action here recently… And it has seen results. “The number of wealth-management products issued by Chinese lenders sank by 39% in April from the previous month,” Bloomberg reported over the weekend.
And it’s not just WMPs. The crackdown is happening across the board… real estate, cross-border money flows, etc. China has tightened up regulations. And it has raised interest rates.
Investors have gotten the hint. They are speculating less, and buying fewer WMPs. The Chinese government is getting what it wanted.
The thing is, this government tightening campaign creates an incredible investing opportunity…
With across-the-board government clampdowns, investors are scared of China right now. Nobody is invested. Not the Chinese, and not foreigners like you and me. Everyone who wants to sell has sold (or close to it).
This setup typically means we have an “asymmetric” trade setup… where our upside is dramatic, and our downside risk is limited.
Sure, the market could weaken a bit more in the near term. But this setup is what I want to see… China is cheap. And right now, it’s also extremely hated. That means we have limited downside risk versus dramatic upside potential in China.
Don’t look at this clampdown as a negative. Instead, see it as a positive… China is reining in what needs to be reined in. It’s doing the right thing. Meanwhile, investors have fled.
Perfect. Get some money to work in China now, if you haven’t already…
Good investing,
Steve
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Source: Daily Wealth