There has been no shortage of news concerning China recently, everything from the heated exchange in the Presidential Debates between the President and Governor Romney to the Japan/China territorial conflict to the recent strengthening of the yuan to Apple’s Foxconn woes.
But perhaps no China topic receives as much attention as the “hard versus soft” landing issue, and recent numbers on GDP and other elements of China growth has the media abuzz once again. This takes on particular importance with the backdrop of the “regime change”.
Such a change is a generational shift and generally occurs once a decade, with the BBC reporting that “it could be the start of an unnerving period of flux, which combined with the U.S. election, could present new leaders who have very different attitudes from the current leaders.” (Others have a slightly different take, seeing a very tightly controlled economy not running too hot or too cold into the new leadership change, with few extremes to either side of the ledger.)
But we digress. Let’s look at the recent figures as reported in a number of sources:
China’s National Bureau of Statistics reported Thursday that GDP slowed to an annual rate of +7.4% in the third quarter, the lowest growth rate since 2009.
This was in line with the FactSet consensus for a rate +7.4% but below the +7.6% rate of growth seen in the prior quarter and marked the seventh consecutive quarter of slowing growth and was the weakest rate seen since 2009.
Industrial Production rose to +9.2%, which was above the consensus for a rate of 9.0% and last month’s 8.9%.
Retail Sales grew by +14.1% on a year-over-year basis, which was above the consensus for +13.2% and above Q2’s rate of +13.5%.
And finally “Fixed Asset Investment” increased by +20.5% on an annual basis, which was above the consensus for a rate of +20.2%.
China’s Shanghai stock market index rose +1.25% in response to the reports.
The question is, how does this fit into the going forward picture in terms of “hard versus soft” landing?
“While our growth forecast for China is substantially below consensus, we do not consider this to be a ‘hard landing’ scenario,” Ramin Toloui, global co-head of emerging markets at PIMCO in late September, as reported by the WSJ. (PIMCO is calling for inflation-adjusted growth of 6.5%-7.0% over the next twelve months).
Mr. Toloui added, “China’s government retains numerous policy tools to avert a hard landing, including more aggressive cuts to reserve requirements and interest rates, relaxation of housing-market controls, and if needed, a larger fiscal response.”
Mark Williams of Capital Economics was interviewed recently on Bloomberg Radio and remarked that the numbers released fit in with his view of a “New Normal” for China (borrowing PIMCO’s pet phrase), saying markets should not expect a return to 9-10% growth levels any time soon. But Williams also pointed out that with mainland HH incomes still growing steadily versus YAG, market hopes for further aggressive stimulus might be a stretch, at least if the 7%+ growth rate holds steady or improves.
Barry Bosworth, senior fellow at Brookings Institution seemingly agrees: “This does, so to speak, mark an end of an era. But I think China has lots of room to maintain its growth, stabilize it, but it has to shift the emphasis to focus on its domestic market. In the grand context of a global recession, this is an amazingly good job for a country that is so dependent on exports to the global economy. I think we are in a world where China’s growth is going to moderate and I think it will stay in the range of about 7% to 8%.” (Yahoo Finance).
Ok, three rather respected sources, one a bit more pessimistic than the others, but no doomsday scenario shaping up, which would seem to reinforce the notion that hoped for massive QE efforts coming out of China might not materialize any time soon (equity markets and Tim Geithner “calls” for same notwithstanding).
Geithner had some pointed remarks regarding China at the IMF/World Bank talks last weekend in Tokyo, with channelnewsasia.com summarizing:
“Geithner said there had been ‘some progress’ in China’s trade relationship with the US, but ’domestic consumption still does not play a sufficient role in driving China’s economy. Progress toward strengthening domestic demand will be good for China, and good for the global economy. In a rapidly changing world, it is crucial that we continue to modernize’.”
Official China comments on the recent data were upbeat:
“Exports have gradually recovered, consumption has grown steadily, price inflation has clearly receded, the job market has been very good,” said outgoing Chinese Premier Wen Jiabao, in what Forbes called “an obligatory feel-good reassurance.”
And Zero Hedge reported this past weekend from Reuters:
“China’s central bank governor has warned that quantitative easing policies worldwide could cause inflationary risks, state news agency Xinhua said on Saturday. The remarks by People’s Bank of China (PBOC) Governor Zhou Xiaochuan come even as analysts credit policy easing from G4 central banks – the U.S. Federal Reserve, the European Central Bank (ECB), the Bank of Japan and the Bank of England – in the third quarter of the year as underpinning business confidence.”
However, what does this all mean for China investment plays? Year to date, while most global markets have seen increases of 10% +, the Shanghai Composite has dropped 3% and is off around 10% over the past year, despite some recent gains. (The much followed FXI iShares China 25 ETF has fared significantly better, up about 1.7% YTD, with a nice run recently from lows around the $32 area to $37 and change last night).
CNBC sought out Credit Suisse’s Vincent Chan, head of research for China, who sees a 20 percent upside for Chinese shares at the very least, especially since stock market valuations are back at 2008 levels.
“In view of stabilization in the macro economy, we expect limited market downside — and the market should recover from here,” said Chan in a report published last week. Credit Suisse likes banks, materials, and transportation companies, and upgraded them to “overweight.” The firm downgraded consumer staples and technology, mainly Internet plays, to “underweight.”
Capital Economics’ Williams was less bullish on cyclical plays related to infrastructure and heavy equipment, looking instead to the growth in HH income leading to more focus on consumer-oriented stocks. (Which might lead one to names such as CHL, BIDU, and AAPL, versus the CATs of the world. Coincidentally, Apple just recently announced the opening this Saturday of the largest Apple store in Asia Saturday in Beijing and a new Shenzhen store will soon follow).
And Tim Seymour, Fast Money’s emerging markets guru, said last week,
“The data last night tells you again GDP is not going to 9.5 percent anytime soon, but it’s ticking higher. The retail sales is what is encouraging, the consumer consumption that everybody wants to see.” (Seymour had some positive mentions for FXI, VALE, BHP, RIO, and TCK.)
Whatever one believes in terms of China equity exposure, history would seem to say one thing should remain a constant—a “well-managed” government transition with few wild surprises in store, at least in the official China version of things. (And we doubt we will be seeing too many domestic Chinese “Truthers” any time soon).
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