[00:00] Hello, here from Target at 10,000. I have four predictions for Chinese stocks. And with recession looming, what will be the big factor of 2008?
[00:13] In oceanography, a recession is a sudden decline of sea level. The warning bell before a tsunami hits is now almost universally accepted that the United States economy and possibly Japan and parts of Europe are in recession.
[00:26] We'll be certain by March. Nearly all of the world's big investment houses predict no recovery until the fourth quarter of the year, at just the time China may overheat. Welcome to 2008.
[00:38] If you're like me, you've already seen your share of negative signs in your investments. Volatility will be the rule this year, and I expect Chinese stocks will be even less predictable than they were in 2007. But first, let's look at where we are now.
[00:50] The Shanghai Composite's launch all week was closed January 18 with a modest uptick to 5,180.51. As I predicted some time ago, 5,000 appears to be a new baseline going back several months.
[01:04] The CSI 300 has remained above 5,000, which has gone fairly well since the year began. The index closed at 5,414.47 on January 18. Shanghai D shares are still relatively flat with lackluster transaction volumes.
[01:17] The new baseline for Shanghai D seems to be 350. Chen Ha-Chin-Chin these years have lost all their gains since 2008 began. Will they manage to stay above 600 in the short term? For the first time in modern history,
[01:31] Chinese macroeconomic policies and the behavior of China economy will impact most of the world The decisions of Chinese policymakers as they deal with money supply mobility and exchange will be as important if not more than the policy directions of the U Federal Reserve or the European Central Bank this year
[01:49] The International Monetary Fund expects so-called emerging markets to account for 80% of global growth this year, with much of it coming from China. It expects continued high growth in China to lead to inflation,
[02:01] and Chinese demand for oil, coal, metal, and nearly all other commodities to give no relief in rising prices for energy and industrial goods. Indeed, some analysts believe that this inflationary benefit of globalization could be ending
[02:14] as Chinese, Indian, and other major economies outside the G7 continue to pressure prices for energy and commodities, offsetting the lower cost of their merchandise exports. Competition for energy resources will continue in 2008,
[02:28] and I expect will become an issue in the American race for the presidency. In fact, as I predicted last year, I see full-scale China-blaming and China-bashing to emerge as a theme in both the Democratic and Republican parties.
[02:40] In particular, we will see a lot of talk about sovereign wealth funds and specifically the China Investment Corporation. Sovereign wealth funds are hot potatoes because they make great incendiary headlines and help politicians direct blame outside their bad direction.
[02:55] The sovereign wealth funds behave much as giant pension and hedge funds do and could play an important part this year in holding up stock values as they buy into markets and make direct investments into growing industries. Nevertheless, I expect these funds and the China Investment Corp. to be discussed a lot this year
[03:11] and it will be important to watch what they do. Here is my take on where Chinese stocks will be a year from now I see four possible scenarios with a very wide range of possible outcomes In all four scenarios which I will describe next I see the potential for great volatility in prices
[03:28] Each scenario is based on certain conditions existing within China and in the global economy, and uses three or four data points of historical performance in the Shanghai Composite Index. My first prediction is the hot scenario that shows the Shanghai Composite Index reaching 10,000 around New Year's 2009.
[03:46] This outcome is predicated on Chinese stocks repeating the tremendous performance of 2007 and China's economy growing at over 10% or higher. This scenario also anticipates that China's government will be unable to contain inflation.
[04:01] The hot pressure carries with it the risk of possibly strong contractions and even a long-anticipated stock market crash if the Chinese government is forced to bring on a hard landing in the first half of 2009.
[04:13] This scenario is consistent with the classic boom and bust trifles of China's recent past and requires that the government's policy direction either backfire or that the government lose effective macro control.
[04:25] It carries with it a lot of risk, but could mean great short-term, that is, one to two-year gain. My second possible outcome would be the flat scenario, with the Shanghai deposit index closing between 5,000 and 6,000 at the end of 2008.
[04:38] This last scenario seems a hard recession in the United States and Europe, and much slower demand for nearly all segments of the global economy. For this scenario to occur, Chinese stock prices might be subject to a strong downward adjustment,
[04:51] perhaps even a modest crash, and Chinese consumption will be more abundant, in the face of slower growth in China overall These conditions could be most pronounced in the last quarter of 2008 Under this scenario you may not lose money at the end of the year but your gains would have been hard won
[05:06] and come with some possibly serious losses. Vision three is a moderate scenario with Shanghai compositing between 6,000 and 7,000. For this outcome, China's government would stall with poor policy direction,
[05:18] and there would be risk of retaliation by one or more of China's major trading partners. This is a possibility, given the political environment in the presidential elections in the United States. The moderate scenario does envision growth overall,
[05:30] but nothing like the experience of last year. Lastly, my fast prediction sees the market in the year at a sustainable and healthy level, reaching up to 8,000. This scenario assumes nearly all conditions be favorable.
[05:42] That external demand flows just enough to lessen trade friction with major customers, such as the United States, women being appreciated and accelerated, and the new government changes without a hitch,
[05:54] and policy measures be smart and well-received. This is a fast forecast that expects a smooth year marked by a successful Summer Olympics and, for good measure, the election of an American president with favorable overall policies toward Beijing.
[06:07] Remember, the key areas to pay attention to at all times with Chinese stocks are inflation, real estate prices, capital outflows, V&D appreciation, exports, investment,
[06:20] consumption, decentralization and growth of the private sector, domestic political situations and foreign relations. Welcome back, and I'll see you next time.