Once upon a time, when the US sneezed, Australia caught a cold.
That’s still true to some extent. The forces that move the world’s largest economy push the Australian markets around every day.
When the stock market hits a turbulent patch, like the one we’ve lived through this month, those moves tend to amplify.
But as China continues to rise, the way its economy twists and turns will impact the Australian share market more and more.
That’s why this month’s action from the Chinese authorities could have a huge bearing on whether your portfolio grows or shrinks…
Yesterday, the market heard that Chinese industrial profits grew by the equivalent of nearly $100 billion in September, reversing a similar drop in August.
Sometimes, we find it hard to trust official economic data in the Middle Kingdom…but it’s hard to fake a figure like this. The data paints a rosier picture of the Chinese economy than what traders had in mind.
That news buoyed stock markets around the world.
But industrial profits are only one measure of the health of an economy. As Aussies well know…the property market is an important bellwether.
That’s why the direction of China’s home prices should ring alarm bells.
Chinese officials provide a snapshot of their property market’s health by monitoring home prices in its 70 biggest cities each month.
Even that figure should astound you. The Aussie authorities would measure prices in just seven cities, few of which would be big enough to make China’s list of 70. We’re dealing with a mammoth economy here.
Anyway, monthly prices dropped in 69 of those 70 cities in September. They fell across 68 cities in August. And prices fell in 64 cities in July.
If the Aussie property market showed that kind of performance, there would be blood in the streets of Sydney and Melbourne.
China must address this. It needs to keep its citizens happy and obedient.
So the authorities will want to reverse this trend of lower house prices.
But a remarkable sense of calm is coming from Beijing. They know they have the playbook.
They just have to follow Uncle Sam’s lead…
The Chinese blitz
Crashing stock and real estate prices in 2008 planted the seeds of the recent giant rally in US and Aussie shares.
The US government stepped in with a massive stimulus program during the crisis in 2008. It caused property and the share market to soar. Notwithstanding this month’s volatility, prices are soaring to this day.
To stem the bleeding in the share and real estate markets, Ben Bernanke — chairman of America’s central bank at the time — cut interest rates to zero and put in place wide-ranging, unorthodox stimulus programs.
As you can see in the chart below of the benchmark SS Composite Index [SHA:000001], Chinese shares are down nearly 60% from 2007’s highs. With the stock market languishing and real estate prices falling almost everywhere, you can bet the Chinese government will step in.
Source: Google Finance
Click to enlarge
That intervention has already started — in a major way.
China’s government is forcing property prices higher by making it easier for people to get a mortgage. They’re easing restrictions and cutting minimum deposit amounts.
It’s a stark contrast to the state of play in Australia. The loudest commentators here are calling for the authorities to keep a lid on Aussie home prices.
China’s action is already working. Barclays plc [LON:BARC] reports that just last week, sales in 32 cities rose to their highest levels this year.
But it doesn’t end there.
The Chinese government is so keen to push up stock prices that it has gone on a media blitz.
‘The official Xinhua News Agency [run by the Chinese government] published at least eight articles this week advocating equity investing, after similar stories appeared in the People’s Daily newspaper and on state-run television last month, part of what Everbright Securities says is an increased government push to bolster the market. Authorities have also cut trading fees, made it cheaper to open new accounts, and organized investor presentations by the biggest listed banks in the past two weeks.’
In short, China’s government is actively trying to drum up interest in its stock market among its people…and it’s not exactly being subtle about it.
In years gone by, this kind of appeal might have fallen on deaf ears. The Western-style culture of stock investment is still relatively new to China.
But as we noted in the latest report for Australian Small-Cap Investigator, China’s middle class now consists of around 300 million people. Global advisory firm KPMG forecasts that figure to swell to 630 million by 2022.
That’s a lot of potential stock market investors.
As we mentioned earlier, China is just following Uncle Sam’s playbook here.
The US government did its darnedest to prop up the financial markets in 2008. And look what happened — we’ve ridden the greatest stock market boom in years.
The same story is playing out in China now. Take a step back and you’ll see a government committed to pushing its local stock market higher — just as Ben Bernanke and his pals in government did in 2008.
They’re serving it up, and the effects should flow on to Australia.
You don’t necessarily have to agree with these kinds of policies…but you should be taking advantage.
That means you should be investing in the Aussie stock market — particularly in sectors, like resources, with strong links to Asian prosperity.
Editor, Money Morning