(Bloomberg Gadfly) -- A curious thing is happening in China: Its stocks appear immune to any economic slowdown.
For years, there was a strong correlation between China's GDP growth rate and the performance of the benchmark MSCI China Index, which tracks Hong Kong and U.S.-listed Chinese companies. The relationship was so pronounced that fund managers sifted through an array of macro indicators trying to fathom just how fast Asia's biggest economy was really expanding, with some arguing the actual number was as much as one-third lower than official statistics.
This association, however, started to disintegrate in 2017. Last year, the MSCI China Index rose 52 percent, beating the S&P 500 for the first time since 2012 even though economic expansion was slowing.
One may argue an asset bubble is forming. When the relationship last broke down in 2015, China's stock market frenzy had spilled over into Hong Kong. Then came a spectacular crash, bringing the correlation back in line.
But calling a bubble is an intellectually lazy way out.
A contrarian view could be that China is finally moving away from being a developing nation, and evolving into an advanced economy. In the U.S., share buybacks have a larger impact on the S&P 500 than how the economy is faring.
There are plenty of other catalysts that can drive China's shares higher, though.
Industry consolidation is already a big theme for investors. So long as the big fish, which tend to be publicly traded companies, can swallow up the smaller ones, firms can grow a lot faster than the targeted 6.5 percent GDP, or so the argument goes. A stronger market position means greater pricing power, and fatter profit margins.
Last year, three of China's largest developers, Country Garden Holdings Co., Sunac China Holdings Ltd. and China Evergrande Group, were among the best performers in Hong Kong even though Beijing kept a tight lid on real estate. Investors were betting on the winners taking all. Citigroup Inc. estimates China's top 10 property firms can snatch 35 percent market share this year, up from 20 percent in 2016.
The Hong Kong-listed shares of Haier Electronics Group Co. are up 30 percent this year. Again, market-share gains are to thank, with the washing machine maker encroaching on Siemens AG's turf.
There's also Gree Electric Appliances Inc., whose Shenzhen-listed shares are hugely popular with foreigners through the country's stock connect program. The top five air-conditioning companies now command 84 percent of the market in China, up 12 percentage points from five years ago, Morgan Stanley estimates. Gree's stock has risen 57 percent over the past 12 months.
Brewing is another industry undergoing consolidation, with China Resources Beer Holdings Co. in talks to buy out Heineken NV's local business. China Resources Beer has also beaten the broader market this year, with its Hong Kong-listed shares rising 24 percent versus the Hang Seng Index's 1.7 percent.
It's not hard to get the picture. China's great growth turbines may be slowing but stock markets aren't always about the economy, stupid.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.
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