Will the Chinese markets take the gold medal in 2008?

With the start of 2008 China has had its stock market surge, yet there are some questions. Already the impact of the Olympic games in August are being felt, as the Shanghai Composite Index at 5,272.8 points. While that is a mere 0.21 percent for the day, stocks related to the Olympics as well as Beijing-based and consumption-related stocks recorded gains of up to the 10 percent daily limit.

There is no question that the Olympic games are a source for a surge in any country that is host of the games. And the effect has been seen in 2007 with the 55% gain of the year, even with the technical bear market the stock markets fell into that same year. Expectations are that gains for 2008 will reach 35%, and the IPO market is flush.

But the question of inflation is hardly unheard. In November the CPI number reached 6.9%, which is a level unseen since the last century (1996 to be more exact). This is of course causing some tightening in the financial sector, and many see that sector being held back as a result.

But the Olympics are hardly the only factor affecting the Chinese markets. There is the potential bidding war for China Eastern, that is giving some loft to that entire sector. And Shanghai Diesel Engine is another that has enjoyed the profit from takeover news.

As I’ve mentioned before, many expect the Chinese markets to out perform all of Southeast Asia. The shipbuilding sector has been the target of several analysts, others looking at the exploration and refining of oil. And as mentioned above Chinese investors have placed some $61 billion into the IPO market.

So is this the start of a great year in China? Will there be a surge in that market again this year? Will the bear market rule and become an Usra Major instead of Ursa Minor? And most importantly is it too late to be involved?

My guess would be that the answer is yes and no. Like all things in any stock market, a run in any sector begets more investors jumping in, and some are bound to be top-ticking. But given that fact, the Olympics are still half a year away. The surge in international visitors has yet to hit the nation, and profits from that are yet to be realized.

The service sector has yet to really have the same benefit being projected in other sectors. Obviously inflation will retard some of this gain, and the gain will be anticipated prior to the actual international competition. The IPO markets are an unknown factor, but considering the growth of 270% it can be expected that even more investors will continue to seek out new companies. And as with all new companies the potential to innovate and succeed is impossible to full analyize in the short-term.

No matter the short-term effects of the Olympics, which I expect will dominate news and comments about the Chinese markets this first half of 2008, there are many things influencing China stocks. Most of them are long-term factors, and will have fruition well after the gold medal ceremonies have finished.

I would say, in my opinion, that the really most vital question is what are the financials going to do. With monetary tightening and inflation realities hitting the sector, it’s not the most favored sector. But if China stock markets act like other world stock indexes, they could be the indicator that sets the pace for the year and those to come.

Predictions of China's growth by the Christmas tree

I have often found that some of the best information comes from the least expected places. For example I recently was at a Christmas party for a top NYC law firm. One of the people I met was a trader who specializes in Southeast Asia.

This trader believes that Japan, China, and Australia will all be exceptional areas of growth throughout the next 5 years. China is his personal favorite. I paraphrase…

“China has the sheer manpower that will help it outperform. In many ways it is similar to Japan of the 1950’s.”

It is hard to argue that point. Especially since the $5 billion 9.9% stake in Morgan Stanley was made December 19th. This positioning and the $29 billion Chinese buyers spent buying outside companies signal a long-term plan by China to integrate with the world markets in a more direct manner.

There is no question that the manpower resources available to Chinese corporations are a unique resource few nations can match. Add the previously stated investments and time, and you get growth and stocks that can surge longer and stronger than even in the last Chinese bull market.

But there are serious negatives. The Chinese stock market is hardly as transparent as many might wish. The latest bull has very recently reversed into a solid bear market. That transition occurring in an amazingly rapid month. And of course the communist nature of the Chinese Government adds political issues; some of which are known, some unknown, and 1 thing is assured – volatility.

There is no lack of investors that agree with the abovementioned trader I met. In fact I agree with reservations. While I am perhaps more cautious than Warren Buffett, China is a market that demands attention. The only question is the one most vital to all investors.

When is the right time to get in and out?