Fears for China’s growth post­poned

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

The Chi­nese govern­ment has once again sta­bilised the econ­omy. Spooked by de­cel­er­at­ing growth and a property mar­ket cor­rec­tion early in the year, the govern­ment has spent the last few months loos­en­ing credit and rolling out sup­port­ive poli­cies. Last week’s eco­nomic data re­lease showed the pay-off: GDP growth in the sec­ond quar­ter picked up slightly to 7.5%, beat­ing ex­pec­ta­tions it would be flat at 7.4%. This means that in­vestors’ fears about a col­lapse in China’s eco­nomic growth can be put off for yet an­other year. But the suc­cess of govern­ment stim­u­lus will not in it­self an­swer all the con­cerns about longer-term prospects, or pro­vide a cat­a­lyst for the rerat­ing of Chi­nese eq­ui­ties.

There were sev­eral pieces of good news in the lat­est data re­lease: property sales were flat af­ter de­clin­ing for three months, a sign that the re­cent cor­rec­tion may not be pro­longed. In­dus­trial pro­duc­tion and fixed-as­set in­vest­ment con­tin­ued to pick up. In ad­di­tion, fears that wide­spread cor­po­rate de­faults would strain the bank­ing sys­tem have not been re­alised. On the bad news front, con­sumer spend­ing weak­ened af­ter hold­ing up well ear­lier in the year. This com­bi­na­tion points to an­other quar­ter at least of de­cent growth, though it will still be a stretch for China to meet its tar­get of 7.5% GDP growth for the full year.

But there is limited po­ten­tial for growth to ac­cel­er­ate fur­ther in the sec­ond half. And the re­cent sta­bil­i­sa­tion may not last long since it has been driven pri­mar­ily by faster credit growth and higher fis­cal ex­pen­di­ture. The cen­tral bank has turned rather dovish and bank­ing reg­u­la­tors have loos­ened the loanto-de­posit ra­tio, which led to a re­bound in credit growth in May and June. Yet even the mas­sive amounts of new credit be­ing is­sued - the cen­tral bank ex­pects ag­gre­gate fi­nanc­ing to in­crease by RMB18.5trn this year - will only push up credit growth to 18% or so by the end of the year, from 17% in June. Credit growth could well start de­cel­er­at­ing again in early 2015. And on the fis­cal side, while spend­ing in the first half jumped 16%, the budget calls for just a 9.5% in­crease over the course of the year-mean­ing that spend­ing growth needs to slow to 6% in the sec­ond half to stay within budget.

So while China has se­cured sta­ble growth for now, by early 2015 it could well face the same prob­lem it did ear­lier this year: that growth is slow­ing while the room to deliver additional stim­u­lus keeps shrink­ing.

How should in­vestors trade all this? Chi­nese stocks have un­der­per­formed both In­dia and In­done­sia this year, where in­vestors ap­pear to put more faith in the abil­ity of new po­lit­i­cal lead­ers to deliver a bright eco­nomic fu­ture. But Chi­nese stocks have also done even worse than Thai­land af­ter its mil­i­tary coup, which could ar­gue that it is time for in­vestors to ro­tate into China. In the past, Chi­nese stocks have typ­i­cally ral­lied by 1015% when the econ­omy has emerged from a growth trough. How­ever, we think such a re-rat­ing looks un­likely this time round, since the re­cov­ery will most likely be short-lived, and China’s un­der­ly­ing eco­nomic prob­lems have yet to be solved.

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