The market is always in search of a story and its corresponding trade idea. Unfortunately, so far this year, the US, Eurozone and Japan have been rather uncooperative on this matter as their respective central banks and economies stick to prior trends. As a result, investors have turned to China in the hope of securing this year's performance.
Indeed, the economic challenges facing China in 2014 are very serious. Since 2010, China’s growth performance has been consistently disappointing. The growth rate has fallen from 10.4 per cent in 2010 to 7.7 per cent in 2013. The most recent economic statistics show that the economy is still heading south. More ominously, the black clouds of debt seem to thicken inexorably. The high-profile corporate bond default in March, the first in many years, sent a chill through markets in the spring. Many also thought the sharp weakning of the renminbi was an ominous sign.
China’s slowdown and financial risks have led to a wave of pessimism and potential opportunity for the market: either a big 'China short' is coming, or risk appetite should anticipate a major fillip as authorities inevitably blink and reflate through credit and/or fiscal stimulus. In my view, there isn't a big China trade coming in either direction: the economy may fall further, but it is unlikely that the fall will be so large that the government has to usher in a large stimulus package; the financial instability is true, but resources available for the government to ensure stability are still plentiful.