Turning Negative on China
01/21/2010 4:34 pm EST
Investors have turned bullish on the United States and are less bullish—if not actually bearish so far—on China, according to a Bloomberg survey of subscribers.
Investors who have been waiting for a buying opportunity in China and other emerging markets may be about to get their chance.
62% of survey participants called China a bubble, and while about one-third said China offered the best investment opportunities over the coming year, that was down from October, when 44% ranked China as best.
Investors now rank China in a virtual tie for first place with Brazil and—surprise—the US. That’s a huge turnaround for the US. In October, a majority was pessimistic about the outlook for the US. Now, almost 60% are optimistic.
I don’t think you have to look very hard to find the reasons for the shift in sentiment from China and towards the United States. Investors are clearly worried that recent moves by the Beijing government are just the beginning of a campaign to rein in money supply growth and to put the brakes to runaway bank lending.
In the first two weeks of January, Chinese banks extended $161 billion in new loans. That pace is equal to annual lending of $4.4 trillion, or about four times the $1.1-trillion target for new loans in all of 2010 set by the Chinese government.
The early surge in bank lending has turned what was a worrisome trend that too much lending would lead to speculative real estate and stock bubbles into a crisis that has pushed the Chinese government to take steps to reduce lending far earlier than investors had anticipated.
Thursday’s announcement that the economy grew by 10.7% in the fourth quarter—pushing annual growth up to 8.7%, above the government’s 8% target for 2009—increases the odds that the steps announced so far won’t end the tightening.
Here’s what the government has done to put the brakes on lending just in January.
On January 7, the People’s Bank of China raised the interest rate it pays banks on money they keep on deposit at the central bank. That’s a way to encourage banks to park their cash with the central bank rather than put it into new loans.
On January 12, government regulators ordered state-owned banks to put more money aside as reserves against bad loans. That move was expected by many analysts, but not until the second quarter of 2010.
And then on Wednesday, January 20, the Bank of China and the Agricultural Bank of China announced that they had ordered local branches to stop issuing loans to corporate customers without explicit approval from headquarters. The move was a response to “guidance” from the China Banking Regulatory Commission imposing lending quotas and warning the most aggressive lenders to halt new lending temporarily.
Analysts who pore over the exact wording in government statements in search of clues to the direction of monetary policy say that the government’s announcement of fourth quarter 10.7% growth in GDP points to further efforts to reduce lending.
Until Thursday, government statements had included words promising a “moderately loose monetary policy” and a “proactive fiscal policy.” Those words were absent in yesterday’s written announcement. They had also been omitted by Premier Wen Jiabao in a January 19 report on the state of the economy. Analysts see the new wording—or the omission of the old wording—as a trial run at a new policy slogan that will be finalized at the National People’s Congress in March. (For more on the implications of 10.7% growth, see this recent post.)
Worries that efforts to rein in lending will slow the Chinese economy—or at least puncture bubbles in real estate and stocks—have shaken Chinese stocks. The Shanghai Composite Index was down 2.9% on January 20. The index climbed 0.2% on January 21on the GDP news. Hong Kong’s Hang Seng Index followed a January 20 decline with another drop on January 21. The index fell 2% to its lowest close since October 6, 2009 and is now down 4.6% for 2010.
Other emerging markets have followed Chinese stocks down. Brazilian stocks have been falling in lock step, and the MSCI Emerging Markets Index (EEM) is down 2.3% in two days as of 1:10 pm in London.
A 2% to 4% decline isn’t yet the buying opportunity that many investors have been waiting for. But I don’t think the decline is done, and patient investors may get the opening that they been waiting for.
Full disclosure: I don’t own shares of any company mentioned in this post.