Steady as She Goes for China

01/25/2012 8:30 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

China just released more economic data, and as we read through the tea leaves, it looks like recovery is still the watchword, says Jim Trippon of China Stock Digest.

The latest economic data from China, which included factory output, retail sales, fixed asset investment, and the all-important GDP numbers, initially failed to move China’s markets. The Shanghai Composite Index barely budged, weakening slightly on the news.

Once the market digested the data more fully, however, it staged a 3% rally after the earlier 1.7% drop.

The Shanghai average, which fell slightly more than 20% in 2011, had drifted down from November to January but recently showed some flickers of life, though it has failed to stage a sustained rally. That may be about to change.

According to National Bureau of Statistics figures, China’s GDP grew at an 8.9% annual rate in the fourth quarter. Economists had predicted an 8.7% growth rate, but the actual GDP was likely aided by seasonal pre-Lunar New Year production and spending.

Growth for the full year 2011 slipped to 9.1%, which was less than the 2010 growth rate of 10.4%. This marks the slowest growth for China’s economy since 2009, and is the fourth straight quarter of slowing growth.

Lower global demand for China’s exports marked the quarter, as well as a sharp drop in property investment in the country’s troubled property sector. Consumer spending was a bright spot, as retail sales rose 18.1% in December.

Slowdown to Continue
The consensus from economists’ analysis is that the economy in China will continue to slow. Led by the lower demand for its exports—due largely to the Eurozone crisis, with its European trading partners strapped for cash and buying power—this should constrain China’s export economy for 2012.

A Reuters article quoted economist Yao Wei at Societe Generale, who said that growth would likely slow to 8.3% in the first quarter. She added that the slowdown was "significant" already. Consensus by economists polled by Reuters was for an 8.6% GDP for 2012.

A further drag on the economy is the property sector, which has slowed down dramatically. Property investment fell by 40% in December compared to November, to 12.3% year-over-year from 20% growth, although the market had already seen a slowdown in November.

Beijing has been trying to cool off the overheated sector, though it wants to see the speed of investment slowing happen more gradually. The property sector accounts for roughly 13% of China’s economy, and some estimates say that a drastic property slowdown could knock as much as 2 percentage points off the GDP.

China’s targeted policy for GDP is reportedly to keep growth at 8% annually or above. Michael Spencer, Chief Economist for Deutsche Bank in Hong Kong, maintained in a Reuters article that "the economy is holding up."

Kevin Lai, economist at Daiwa, in the same Reuters piece described the slowdown as "orderly." And George Worthington, economist for IFR Markets in Sydney said the numbers "don’t portray an economy headed for a hard landing." Another economist called the slowdown, "modest."

Still Gradual Easing
Beijing has been slowly, lightly easing from its gradual tightening policy.

The easing, which began in mid-October, has largely consisted of moves around the edges of the economy rather than the direct frontal assault of a benchmark interest rate cut. These moves are characterized by Premier Wen Jiabao as "fine tuning" economic policy.

One move, the banking required reserve ratio, or RRR, which was cut from 21.5% to 21% in November, is expected to be lowered another 200 basis points.

In other moves, small firms will get tax breaks, and while total credit growth was somewhat light at $750 billion in December, that can change fairly quickly. The government has tried to make credit more available to small and medium enterprises, or SMEs, which were affected by the inflation fighting tight monetary policies Beijing had still employed for the early part of 2011. No major interest rate moves are foreseen, however.

With Chinese stocks having been in the doldrums for most of the last year, investors are looking for any signs of direction. The preferred response by Beijing would be to lightly stimulate a gradually slowing economy, without having to massively stimulate as it did in 2008-2009.

Should a hard landing be avoided, as it looks like it will, the scenario could become promising for stocks. Given the downtrodden market as well as the relatively low valuations, though it may take some time, stock prices will be poised to rise.

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