China Becomes the New Hot Trade for Wall Street

Whatever you think about the veracity of China’s economic data, Wall Street is certainly drinking the Kool-Aid. After saying Wednesday that gross domestic product expanded 6.4 percent in the first quarter from a year earlier, which was better than the 6.3 percent forecast by economists, both UBS and Morgan Stanley raised their growth forecasts for this year. The latter said it expected a growth upturn through 2019 “as fiscal easing fully kicks in, trade tensions ease, and consumer confidence normalizes.” Earlier this week, Goldman Sachs recommended some trades for those banking on a China rebound.

It’s hard to overstate the importance of China, home to the world’s second-largest economy, to global markets. For much of the past year or so, the potential for a slowdown has consistently been at or near the top of the “tail risks” cited by investors in Bank of America’s widely follow monthly global survey. As such, any evidence that China’s economy is stabilizing could force investors with bearish bets to unwind those positions. Consider the yuan, which is trading at about its strongest level since July. Yes, China has a lot of issues, namely too much debt and a real estate market most think is a bubble waiting to burst. But many investors realize that it’s hard to bet against the economy of a nation whose government is willing to do and spend whatever it takes at the first sign of weakness. “I think policy makers, who were choosing ‘deleveraging’ over the past two years, are now back to increasing leverage,” said Alex Wolf, head of investment strategy at J.P. Morgan Private Bank in Asia, according to Bloomberg News.