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It is time to turn cautiously bullish on China's economy
By Chris Leung |
November 7, 2012, Wednesday
|
Print Edition
Print Edition
THE improving maturity of macroeconomic management in China should once again be complimented. The successfulness of resisting the temptation of over-loosening credit, alongside the absence of gigantic fiscal stimuli to fuel growth, has created very favorable conditions for staging at least a mild technical rebound that may last two to three quarters.
Geographically, China is a huge country. Nineteen out of 27 provinces which have reported third-quarter GDP figures saw growth in excess of 10 percent. What dragged down the overall level of GDP growth predominantly comes from export-oriented provinces such as Guangdong and Zhejiang. Provinces in the middle and western parts of China are relatively unscratched by trade demises. It is domestic demand that uplifts their GDP numbers.
The rebound is supported probably by "re-stocking." The end of a "de-stocking" cycle is naturally followed by the need for stock replenishment. The recent surge of copper imports in China partially reflects such an emerging trend. It also mirrors the inter-temporal increase in infrastructure spending as a result of China's highly directive fiscal spending. That partially explains better reading of October's manufacturing indicators.
The initial stage of the rebound is likely to be mild as more justifications are required to firm up market confidence. That said, valuations of Chinese stocks are at historically low. And the probability of introducing new reform policy initiatives is high after the top leadership transition is completed.
Inflation is not a prevalent threat now as the Consumer Price Index has consistently advancing at a rate of only 2 percent in recent months. The risk of asset inflation, however, remains well alive. The good thing is that the Chinese government knows this well. Should China lift up the administrative restraints on property market, the impact could be explosive given the strength of pent-up demand accumulated over almost 24 months. Yet, many provinces are able to grow more than 10 percent without the "property fever."
No rate cuts
That explains why the market shall unlikely see more reserve requirement ratio and interest rate cuts. Interest rate outlook is thus at best neutral without any upward or downward bias at this juncture. It looks like the forthcoming rebound will come geographically from the middle/western parts of China as the export-oriented provinces will continue to suffer from the volatility of external trade. It is unclear whether the collective strength of the inner provinces can drive growth in a sustainable manner.
In my opinion, the answer is probably not. But it definitely buys the new leadership some time to come up with concrete reform initiatives that must be executable in practice.
In short, it is time to turn cautiously bullish on China.
Smart money will likely keep pouring into Hong Kong and the Chinese mainland. Both Hong Kong dollar and the Chinese yuan will continue to be well buttressed by capital inflow in the near term. Should economic fundamentals in the fourth quarter and thereafter subsequently confirm the earlier bets by such smart money, monetary authorities in Hong Kong and the mainland will have a hard time dealing with the inflow.
Geographically, China is a huge country. Nineteen out of 27 provinces which have reported third-quarter GDP figures saw growth in excess of 10 percent. What dragged down the overall level of GDP growth predominantly comes from export-oriented provinces such as Guangdong and Zhejiang. Provinces in the middle and western parts of China are relatively unscratched by trade demises. It is domestic demand that uplifts their GDP numbers.
The rebound is supported probably by "re-stocking." The end of a "de-stocking" cycle is naturally followed by the need for stock replenishment. The recent surge of copper imports in China partially reflects such an emerging trend. It also mirrors the inter-temporal increase in infrastructure spending as a result of China's highly directive fiscal spending. That partially explains better reading of October's manufacturing indicators.
The initial stage of the rebound is likely to be mild as more justifications are required to firm up market confidence. That said, valuations of Chinese stocks are at historically low. And the probability of introducing new reform policy initiatives is high after the top leadership transition is completed.
Inflation is not a prevalent threat now as the Consumer Price Index has consistently advancing at a rate of only 2 percent in recent months. The risk of asset inflation, however, remains well alive. The good thing is that the Chinese government knows this well. Should China lift up the administrative restraints on property market, the impact could be explosive given the strength of pent-up demand accumulated over almost 24 months. Yet, many provinces are able to grow more than 10 percent without the "property fever."
No rate cuts
That explains why the market shall unlikely see more reserve requirement ratio and interest rate cuts. Interest rate outlook is thus at best neutral without any upward or downward bias at this juncture. It looks like the forthcoming rebound will come geographically from the middle/western parts of China as the export-oriented provinces will continue to suffer from the volatility of external trade. It is unclear whether the collective strength of the inner provinces can drive growth in a sustainable manner.
In my opinion, the answer is probably not. But it definitely buys the new leadership some time to come up with concrete reform initiatives that must be executable in practice.
In short, it is time to turn cautiously bullish on China.
Smart money will likely keep pouring into Hong Kong and the Chinese mainland. Both Hong Kong dollar and the Chinese yuan will continue to be well buttressed by capital inflow in the near term. Should economic fundamentals in the fourth quarter and thereafter subsequently confirm the earlier bets by such smart money, monetary authorities in Hong Kong and the mainland will have a hard time dealing with the inflow.
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