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Golden cross doesn't make China a one-way bet to riches

Golden cross doesn't make China a one-way bet to riches

It may not be a perfect indicator but moves by the Shanghai Composite Index towards its golden cross could be the latest sign the economy's dreadful 2012 is behind it.

Last year, China posted its slowest growth rate since 1998, but after two interest rate cuts and the approval of a raft of infrastructure projects these fortunes seem to be in reverse.

'After declining for the better part of the last three and a half years, the Chinese stock market has finally woken up a bit,' said analysts at Bespoke Investment Group.

Since approaching a multi-year low in December, the Shanghai Composite Index ended January more than 21% up, and as Bespoke's chart shows, the market will enter a golden cross in the absence of a collapse.

But Tiger bulls should not let their enthusiasm run away with them. This is because China's PMI is back in decline and highlights a risk the recovery may be reliant on infrastructure and that the much needed lift in household spending is still struggling to come through.

The China Federation of Logistics and Purchasing said during January China's PMI fell from 50.6 to 50.4, below the 51 reading hoped for. Adding to this, Capital Economics has decided to hold firm on its belief China's rebound will 'run out of steam' a few months from now.

There are a few positive signals that may keep investors positive on the economy happy for now, as despite being pessimistic on China's near-term recovery prospects, Capital pointed to other manufacturing indices offering better news.

'The HSBC/Markit index rose from December’s 51.5 to 52.3, reaching a two-year high and beating both the flash estimate (51.9) and expectations,' the consultancy said.

There is also little sign of stress within the labour market, with the employment component of HSBC's index rising from 50.1 to 50.9, and local records for 2012's fourth quarter recording a greater number of job openings than individuals looking for work.

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