In the last year, China’s image has taken more hits than Rocky Balboa’s punching bag as a tsunamic “wave of strife” crashes onto the People’s Republic shores. Today, I sit down with EWI’s Asian stock markets specialist Mark Galasiewski (gala-SHEV-ski) to discuss the “psychological” reasons for the reversal in China’s fortune.
Nico Isaac: From social unity to unrest, political veneration to vilification, and financial gains to pains -- China has experienced a 180-degree turnaround. WHY?
Mark Galasiewski: When in doubt, check the price charts. The most familiar expressions of a rising social mood include alignment, supportiveness, forbearance, and optimism. This explains achievements like China's space program, a decade of double-digit GDP growth, the completion of the country's tallest building in Shanghai in fall 2007 -- AND -- from June 2005 to October 2007, the benchmark Shanghai Composite Index soaring 500% to an all-time record high.
Then look what happened.
NI: The bottom dropped out, signaling a reversal in social mood.
MG: Exactly. And, as the Elliott Wave Principle observes, when psychology turns down, feelings of goodwill dissolve into those of discord, opposition, anger and pessimism.
NI: As the Shanghai Composite Index surpassed the 6,000 milestone, the mainstream public coined the market’s ability to defy gravity an “incredibubble” AND credited the “Olympics Factor” for ensuring a “one-way bet until at least August 2008,” when the Beijing Summer Games come to an end. (Wall Street Journal)
What was your professional opinion at the time?
MG: My Global Market Perspective colleagues and I saw another thing coming entirely. The September 2007 GMP publication went on high alert to the Shanghai Composite’s downside potential and wrote: “China’s peak cannot be far off.” On October 16, the index maxed out and plunged 50% in a six-month sell-off to 13-month lows.
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Asian Financial Forecast puts the “Spotlight” on China and reveals whether the region’s stock market is now ready to go for the Olympic gold.
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NI: According to the fundamental experts, two main factors are behind the slide in China’s stock market: “Growing fears of economic weakness in the U.S.” -- AND -- local “government efforts” to cool the public’s speculative fever.
MG: Not on my watch: The S&P 500 Homebuilding Index peaked in 2005, the U.S. housing market boom went bust in 2006, followed closely by the subprime mortgage implosion and 2007 credit industry collapse. Meanwhile, China’s monetary officials had raised interest rates five times, and the bank reserve rate eight times -- yet, the Shanghai Composite bulldozed over every “obstacle” without flinching. In a genuine bull market, no crisis can avert rising prices until social mood itself begins to turn down.
NI: You’ve described some general manifestations of falling mood. What are some specific expressions you see taking place in China today?
MG: Escalating anti-Chinese sentiment, mounting hostilities toward the Olympic Games, pro-Tibetan protests which sparked the greatest violence in the region since 1989 (Lhasa incident), and the “wave of panic” surrounding the recent outbreak of hand-foot-and-mouth (HFMD) disease among the country’s children.
NI: Could you elaborate on that last one?
MG: In Global Market Perspective’s March 28, 2008 “Special Report,” I explain how “infectious disease plays a prominent role in corrective periods.” A prime example is the SARS epidemic, which terrorized China for two-and-a-half years before health officials declared an end to the virus in a May 2005 New York Times titled “SARS Vanishes.” One month later, the Shanghai Composite Index recovered from an eight-year low and embarked on its unprecedented bull ride.
NI: Considering the degree of China’s social malaise, do you see a bottom forming in the region’s stock market any time soon?
MG: Nothing answers that better than my original price charts and objective analysis in the May 2008
Asian Financial Forecast, which is included at no extra cost with a risk-free subscription to
Global Market Perspective.