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Maybe Spain will formally request a bond-buying program from the European Central Bank in the next few days, setting off a global stock market rally. But my bet on a macro trend to drive global stock prices over the next four to six weeks would be on China.

The Communist Party finally announced a date -- Nov. 8 -- for the 18th party congress that will formally transfer power to Xi Jinping and a new (or "newish" anyway) group of leaders for the next 10 years. Investors have been waiting, increasingly tensely, for the party meeting date. Each day that passed without an announcement raised fears that the transition would be tumultuous. So there was a small but still audible sigh of relief on Friday, when the schedule was finally set.

The odds are good that investors will drive the prices of Chinese stocks higher as soon as the National Day Golden Week holiday, which began Monday (with an estimated 85 million Chinese hitting the road), ends and markets open. Last week, stocks in Shanghai started to rally on speculation that the government would use the holiday period (when the stock market is closed) to announce new stimulus measures and new rules to encourage stock buying.

Let's handicap the odds that Chinese markets will see that rally continue after the holiday.

2 reasons for a rally

First, valuations on the Shanghai market are extremely low. The Shanghai Composite Index is valued at 10.3 times estimated earnings. That compares with the U.S. Standard & Poor's 500 Index ($INX), at 12.6 times projected earnings; the London FTSE 100 Index ($GB:UKX); and Tokyo's Nikkei 225 Index ($JP:N225), at 35.68 times projected earnings..

Now there's absolutely no reason a cheap market can't get cheaper, but the Chinese media have been full of statements like this lately: "History shows that a low market valuation tends to be followed by a considerable rebound," Liu Ti, the director of the Financial Innovation Laboratory at the Shanghai Stock Exchange, said last week. The laboratory also reported that blue chips (however defined) in Shanghai are trading at the lowest level in history.

image: Jim Jubak

Jim Jubak

Second, continued bad economic news has heightened speculation that the government and the People's Bank will move more forcefully -- sooner rather than later -- so that the new leadership team will take over an economy that is showing accelerating growth.

From this perspective, the just-released report that the manufacturing sector contracted in September -- for a second straight month -- is actually good because such bad news increases pressure on the government. The Purchasing Managers' Index was below 50, indicating a contraction, marking the first two-month decline since 2009, a survey for the National Bureau of Statistics and the China Federation of Logistics and Purchasing indicated. This increases pressure for government measures to reverse a stubborn economic slowdown.

The index came in at 49.8 in September. That was better than the 49.2 reading in August, but it still indicated the economy was contracting. And it was below the 50.1 median forecast from economists surveyed by Bloomberg.

From this point of view, even bad economic and financial news from Europe (unless it turns deeply scary) can be seen as a plus, since slower growth in China's biggest export market will goad Chinese officials and regulators into earlier action.

On this kind of thinking, Shanghai stocks rose 1.45% on Friday and gained 2.96% for the week. That gave the index a 1.91% gain for the month, snapping a retreat of four consecutive months.

Traders and speculators were encouraged last week when Shanghai stocks rebounded strongly after dipping briefing through the 2,000 level.

Betting on the government

You'll notice that all this is about sentiment, and attempts to read the tea leaves to predict what twists and turns that sentiment is apt to take. Certainly investors can't yet see any fundamental improvement in the Chinese economy that would lead to higher earnings, which in turn would support higher stock prices. In fact, what we can tell of the upcoming third-quarter earnings report argues that large swaths of the Chinese economy will report falling profits if not outright losses. Already, leading Chinese companies such as Baidu (BIDU) and critical Chinese sectors such as the steel industry have guided stock analysts to expect hard times.

But stock markets look ahead, so it wouldn't be unusual if the Shanghai market were looking past a rocky third quarter and anticipating a better fourth quarter. In addition, the Shanghai market also normally moves on attempts to predict changes in government policy. Traders in that market frequently buy and sell in an effort to profit from shifts in government policy and the timing of those shifts. In that context, a rally here wouldn't be unusual.

Do you want to put some money into a potential rally based on speculation about sentiment built on the crowd's anticipation of a change in government policy?

If I put it that way, your answer is almost certainly no.

But how about if I argue this way: The Shanghai Composite Index is down 70% from its all-time high in October 2007 and down more than 40% from its post-financial crisis high in August 2009. The index is trading at the same level as in mid-2001. The stock market of one of the world's fastest-growing economies has gone nowhere in a decade. Isn't it ready for a period of outperformance?

Especially if China and other emerging stock markets re-establish the kind of anti-correlation to developed markets that they've shown for a good part of recent history -- until the European debt crisis in fact. From a long-term point of view, the recent period where Chinese stocks tanked when European stocks stumbled has been the exception and not the rule. If China can re-accelerate its rate of economic growth, aren't investors looking at a return to a period of anti-correlation, when problems in developed stock markets are met with a period of outperformance for Chinese stocks?

You might recognize this as just another version of the Shanghai-market-has-to-go-up-because it's-so-cheap story above, but with a different, more global set of statistics.

Like the more purely Chinese version of the story, it is based on a belief that an acceleration in growth -- not visible now -- is around the corner. We can't yet see signs that the current stimulus has had any effect on growth, but we're convinced, this view goes, that the government is about to increase the speed and volume of its stimulus measures and that those new measures will work.

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Frankly, I think I'd put more faith in the theory that Chinese stocks will rally on speculation that the government will move than I would in the theory that stimulus will actually work this time. I'm just about positive that the government will announce new stimulus measures in the weeks leading up to the party congress, then pile on even more after the congress in order to show the vigor and control of the new leadership after what many Chinese analysts are now calling a period of drift.

Those announcements in and of themselves will likely be enough to fuel a rally.

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