Tuesday, August 17, 2010

China Elliott Wave Count

China's leap over Japan recently as the world's second biggest economy made headlines this week but China has been growing already for over 30 years at rates never seen in any other major economy in modern times. And in a decade or two China's economy will take over the US as well and if we use the correlation of stock markets and the size of an economy, it means the Chinese stock market will likely be 100% of their GDP by 2020-2025 or basically 5-6 times its current size thus providing an excellent hedge opportunity for anyone shorting advanced markets or just as a long position trade.

I have been following the Chinese economy since the early 1990's because China was my favorite subject for marketing and research among emerging markets. Back then, China was 8th in world trade and the size of the their economy was roughly the size of Canada's or basically 1/1oth of what it is today. I remember presenting my research to my International Marketing professor whom at the time was somewhat surprised by the projections for growth I had come up with. But now, China is on everyone's radar and that translates into a multitude of opinions from skeptical to extreme bullishness on the Chinese economy. However, just like I had my projections for Chinese trade for year 2000 in 1094, my projections for the Chinese economy puts it as the largest economy in the world in the 2018-2022 timeframe. The math at this point is very simple, China's GDP stands at $5 trillion (and its currency is undervalued, meaning it should be higher) and the US GDP stands at $14 trillion. If China continues to grow at 9% a year as it is projected to do in the foreseeable future and the US grows at 2% a year combined with a 30-40% currency appreciation, that would put China and the US as equals around the timeframe mentioned with China eventually surpassing the US. Obviously, there are obstacles and challenges ahead like a second world wide recession, a very prominent Chinese real estate bubble, etc. But just consider the challenges China faced in 1978 when it first implemented capitalist reforms, it's economy was in shambles and was experiencing Sub-Saharan levels of poverty, nobody could have then predicted the Chinese economy would grow 9000% in 32 years time and become the second largest in the world in such short period of time.

Now, some might be asking why I decided to write about China on an Elliott Wave Trade site. And my reason is that I believe China is currently experiencing the beginning of Wave 3 or still working on Wave 2 on a Cycle wave in a Grand Super-Cycle Wave 1, with Cycle Wave 1 topping at Shanghai 5903 and Wave 2 possibly bottoming at Shanghai 1747. What this means to Elliott Wave Traders is that we can trade Chinese shares or ETF's long with a certain level of comfort knowing the way is up or we can use Chinese shares as hedge for traders who short more advanced markets. I will post a count for the FXI (The most traded Chinese ETF in US markets) in near future.

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