Fears for China’s growth postponed
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.