Four Forecasts for China in 2010

12/17/2009 12:00 pm EST

Focus: MARKETS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says the Chinese economy and stock markets should continue to roll in the New Year.

Let's take a closer look at my expectations for the Chinese government's monetary policy, China's gross domestic product growth in 2010, and the valuation of the Chinese yuan, as well as my thoughts on where the market is headed in the New Year.

Here are my four main, overarching forecasts for China next year:

Monetary policy. Government leaders will maintain pro-growth policies because the economic recovery is still not sufficiently widespread or stable. [But] I'm still looking for a gradual move away from monetary easing in the second half of the year, as China's economic recovery will be widespread in the first half of 2010.

I expect two to three rate hikes next year as inflationary pressure builds. And similar to China's other high-growth years in the past, I do not expect the gradual policy change to derail the ongoing bull market in Chinese stocks.

Chinese Yuan. I also look for government leaders to stand firm in keeping the yuan weak in the first half of 2010. But continued disparities in economic growth and productivity with the US will likely cause the yuan to appreciate in value next year.

I expect the yuan to rise 6% versus the dollar from 6.8 {yuan to the dollar] to 6.4 by the end of next year, with most of this appreciation likely occurring in the second half of the year when the export sector recovers.

GDP growth. I look for the country's robust economic growth to continue in 2010. In fact, I expect the Chinese economy to revert to its long-term average growth rate of 9.5% next year, slightly higher than now. But unlike 2009, much of this economic growth will now be driven by the private sector once again. Chinese banks will be encouraged to increase lending to private businesses, which will ultimately help create new jobs. 

Stock market. I expect to see at least 10% earnings growth for Chinese companies next year. And this earnings growth will translate into another double-digit gain for Chinese stock markets in both Shanghai and Hong Kong in 2010.

Currently, Chinese companies listed in Hong Kong and Shanghai are trading at 14x and 21x 2010 estimated earnings. In addition, Chinese companies listed in New York are also trading at a 2010 multiple in the mid-teens. These levels are near the long-term average valuation of each market, so prices are still reasonable. By comparison, the Standard & Poor’s 500 is trading at 16x its 2010 estimated earnings.

Overall, I believe that China will continue to be the fastest-growing economy in the world next year, and the market up trend [will] continue. So, we will likely see another strong year for our stocks.

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