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Shares have little chance of recovering as slowdown persists
By Hou Zhenhai and Wang Hui |
August 13, 2012, Monday
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Print Edition
Print Edition
THE rebound in HSBC Purchasing Managers' Index to 49.3 in July from 48.3 in June can barely be sustained. Aggregate demand has yet to present a material turnaround. The year-on-year improvement in infrastructure is mainly attributable to project resumption and the low base effect.
Neither new starts of infrastructure projects nor the growth of project loans has sped up by much, which will continue to be the case unless banks' willingness to lend and the constraints on local government financial vehicles both improve in the near term.
Given the year-on-year decline of new home starts and the government's reiteration of real estate tightening, developers may continue to postpone land purchasing and new home building.
Also, as the inventory growth (15 percent year-on-year) has stayed far above the 2009 level (zero percent), destocking will be a long process in the absence of a strong demand recovery.
All in all, if no monetary stimulus is announced, a market rally is out of the picture and the recovery of aggregate demand will be very slow.
Local governments in Ningbo, Nanjing, Changsha and Guizhou are taking measures to stabilize their economies. This, as well as the central China revitalization program and the Pearl River Delta financial innovation plan, are positive to regional investment. Relevant sectors may generate obvious alphas on the day, or one to two days around the day, when stimulus policies are announced, but with scattered bright spots, weak momentum and poor sustainability.
Policy speculation
We believe policy speculation is highly risky and unpractical as it is unpredictable when the policies will be unveiled and which regions they are going to benefit. But as the possible policies generally aim to scale up investment, speed up the construction of big projects, stir local consumption and support smaller firms, investors may start to focus on previous big decliners or infrastructure-related cyclicals.
In the mid- and long-term, the revitalization of central China tallies with the nation's objective of coordinated regional development and could be an economic growth engine; relevant sectors deserve mid-/long-term attention.
We have heard calls at both the central and local government levels stating the need to stabilize economic growth, but no action has yet been taken by the central government, igniting doubts about the policy stance, objectives and even the possible policy effects. To change such expectations, a cut in the reserve requirement ratio before mid-August is necessary. Otherwise, the downtrend will unlikely be reversed even if local governments release stabilization plans.
If real estate tightening isn't unwound and no measures are taken to loosen the monetary policy and local government financing vehicles (a low-possibility scenario), the Shanghai Composite Index may tumble to between 1,850 and 2,050 points.
Hou Zhenhai and Wang Hui are analysts with China International Capital Corp. The opinions are based on a research note issued on July 30. Shanghai Daily condensed the article.
Neither new starts of infrastructure projects nor the growth of project loans has sped up by much, which will continue to be the case unless banks' willingness to lend and the constraints on local government financial vehicles both improve in the near term.
Given the year-on-year decline of new home starts and the government's reiteration of real estate tightening, developers may continue to postpone land purchasing and new home building.
Also, as the inventory growth (15 percent year-on-year) has stayed far above the 2009 level (zero percent), destocking will be a long process in the absence of a strong demand recovery.
All in all, if no monetary stimulus is announced, a market rally is out of the picture and the recovery of aggregate demand will be very slow.
Local governments in Ningbo, Nanjing, Changsha and Guizhou are taking measures to stabilize their economies. This, as well as the central China revitalization program and the Pearl River Delta financial innovation plan, are positive to regional investment. Relevant sectors may generate obvious alphas on the day, or one to two days around the day, when stimulus policies are announced, but with scattered bright spots, weak momentum and poor sustainability.
Policy speculation
We believe policy speculation is highly risky and unpractical as it is unpredictable when the policies will be unveiled and which regions they are going to benefit. But as the possible policies generally aim to scale up investment, speed up the construction of big projects, stir local consumption and support smaller firms, investors may start to focus on previous big decliners or infrastructure-related cyclicals.
In the mid- and long-term, the revitalization of central China tallies with the nation's objective of coordinated regional development and could be an economic growth engine; relevant sectors deserve mid-/long-term attention.
We have heard calls at both the central and local government levels stating the need to stabilize economic growth, but no action has yet been taken by the central government, igniting doubts about the policy stance, objectives and even the possible policy effects. To change such expectations, a cut in the reserve requirement ratio before mid-August is necessary. Otherwise, the downtrend will unlikely be reversed even if local governments release stabilization plans.
If real estate tightening isn't unwound and no measures are taken to loosen the monetary policy and local government financing vehicles (a low-possibility scenario), the Shanghai Composite Index may tumble to between 1,850 and 2,050 points.
Hou Zhenhai and Wang Hui are analysts with China International Capital Corp. The opinions are based on a research note issued on July 30. Shanghai Daily condensed the article.
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