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April 02, 2012

China Economic News Roundup

1. Business Week - Morgan Stanley is forecasting gains of about 26 percent for Chinese stocks listed in Hong Kong amid low valuations and expectations for improving company earnings and economic growth this year. Morgan Stanley predicts Hong Kong’s benchmark Hang Seng Index to rise to 23,600, 15 percent above its last closing level, while the MSCI China Index may rise 20 percent to 70.

Morgan Stanley increased its estimate for China’s 2012 gross domestic product to 9 percent from 8.4 percent, according to an e-mailed research report on March 29. A Purchasing Managers’ Index (CPMINDX) rose to a one-year high of 53.1 in March, China’s logistics federation and the National Bureau of Statistics said yesterday.

The H-share index gained 7.1 percent in the three months through last week for its second straight quarterly gain. The gauge sank 7.2 percent since March 5 when China unveiled a lower annual target for the nation’s gross domestic product. The measure trades for 8 times estimated profit, a 22 percent discount to the Hang Seng Index (HSI)’s 10.3 multiple, according to data compiled by Bloomberg.

“It’s really those two things -- the degree of cheapness of the market and the prospect for change in perception about China’s growth” that will support the shares of Chinese companies traded in Hong Kong, Garner said.

2. Forbes - On Sunday night, China’s National Bureau of Statistics and its Federation of Logistics and Purchasing released the much anticipated purchasing managers index showing how manufacturing expanded for the fourth straight month. The data was an upside surprise to say the least.




China’s official PMI came in at 53.1 in March, up from 51 in February and 50.5 in January. It was the highest that index has read since April 2011. All this in the middle of a slowing economy. PMI is one of the main data sets used by investors to gauge the growth of China’s economy.

But while the official numbers point to growth, the unofficial numbers from HSBC in Hong Kong showed a slowing economy. By their estimates, China’s PMI slipped to 48.3 in March, dropping from February’s 49.6. HBSC’s 48.3 reading is a tad higher than its original March reading of just 48.1, but not enough to match the direction in which the government says the economy is going.

The differences between the two numbers stem from the survey sample and seasonal adjustment. First, the official PMI suggested that the rebound was led by large government controlled enterprises, while the PMI reading of mid to small cap companies within the same survey dropped by 4.3 to 50.9 in March. The official PMI also tends to be less efficient in eliminating seasonality. The March reading normally rebound by an average of 3.2 during the period of 2005-2011, as production normalizes after the Chinese New Year. However, the rise of 2.1 in March was below the historical average rebound, implying the relative weak strength of growth by comparison. In contrast, the HSBC PMI suggested the average change from February to March was only 0.36.

HSBC’s PMI survey showed that output resumed contraction in March because of a marked deterioration in new orders growth, the reading for which fell to 47.4 in March from 48.5 in February. This can be traced back mainly to new orders for exports (47.7 in March), which was only marginally better than February’s 47.5 and the second lowest reading in nine months. The government’s figures also stated that exports were weak. But that should come as no surprise. They have been weak all year and into the second half of 2011 due to the crisis in Europe.

Meanwhile, it is safe to say that China’s economy, while not the crash landing spectacle some have been cheering for, is slowing and has a good couple months left of contraction before turning the corner, by HSBC’s own estimates.

HSBC’s top China economists expect further cuts in the reserve requirement ratios for banks within weeks, which would allow them to free up capital to lend. This, plus additional tax breaks and fiscal spending should gradually filter through to the economy, enabling GDP growth to bottom out in the second quarter and rebound modestly in the second half.

3. Investors Insight - major financial trends from GaveKal a leading global investment research company. The trends of the future: the internationalization of the RMB, the rise of cheaper and more flexible automation, and dramatically cheaper energy in the US.

We do not claim to have identified all the big trends of the coming decade. The next several years will doubtless deliver many more important changes and investment opportunities (monetization of Japan’s debt and a collapse in the yen? Demographic challenges in numerous countries? Reform and modernization in the Islamic world? Political upheaval and regime change in Iran? Water shortages in China, India and other Asian countries? Possible energy independence for India through thorium-based nuclear energy plants?). But we are nonetheless confident on these main points:

• The three key macro trends of the past decade have come to a screeching halt. This explains why financial markets seem to lack conviction and direction.

• The internationalization of the RMB and the birth of the RMB bond market is likely to be one of the most important developments of the decade. The closest analogy is the creation of the junk bond market by Michael Milken in the 1980s. Interestingly, just as in the early 1980s, few people are taking the time to work through the ramifications of this momentous event. Understanding this new market will prove essential to understanding the world of tomorrow.

• The likely evolution of the US from record high twin deficits to much smaller budget and trade deficits should help push the dollar higher over the coming years. And this in turn will have broad ramifications for a number of asset prices.

Three big trends of the 2001-2011.

• The terrorist attacks of 9/11. This unleashed a decade of bi-partisan “guns and butter”policies in the US and produced a structurally weaker dollar.

• China joined the WTO in December 2001. China’s full entry into the global trading system signaled a re-organization of global production lines and China’s emergence as a major exporter. Export earnings were recycled into the mother of all investment booms, which drove a surge in commodity demand and a wider boom in emerging markets.

• The introduction of euro banknotes.

* We are convinced Beijing will eventually bite the financial reform bullet, and RMB internationalization is the leading edge of that reform.

* It is important to recognize one aspect of policymaking which makes China unique: the country’s leaders wake up every morning pondering how to return China to being the world’s number one economy and a geopolitical superpower in its own right (few other world leaders harbor such thoughts).

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