With the US downgrade and renewed European Union sovereign concern, what is the impact on China’s 2011 gross domestic product (GDP) growth?….
Samantha Ho,
Investment Director,
Invesco Asia Pacific
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This publication is for professional clients and financial advisers only.
……What about inflation? Have we seen the peak and will it come down soon?
With weaker economic data from the US, renewed concern in peripheral Europe sovereign debts, and a higher year-on-year base effect, consensus is pricing in a weaker second half. Our latest forecast is that China will expand by 9.2% and 8.7% in GDP for 2011 and 2012, slightly down from our previous estimate but still very respectable by all measures. China’s economy continues to be bolstered by investments and domestic consumption. On a positive note, pressure on inflation is likely to ease with food prices starting to stabilize and commodity prices moderating. It may be premature to look for a reversal in policies and loosening measures, but we should see a temporary pause, if not the end, to aggressive credit tightening.
With sound fundamentals and its role as global growth engine, investors have high hopes for China but Chinese equities have thus far delivered disappointing returns, in terms of year-to-date and since global rebound in 2009. Although valuation appears cheap by historical standard, the current valuation has embedded earnings risks. While first-half earnings announced have been intact, we are very much mindful that second-half earnings are vulnerable to downgrades due to multiple factors including global slowdown, and higher raw materials and wages. Moreover, FY2012 earnings visibility is increasingly in question should global economic condition deteriorate further. In our view, more clarity will surface in coming months as Q3 results are announced and management provides more prudent guidance for FY2012. The equity market will continue to be predominantly newsflow driven, and stock picking will be the key during current times of turbulence.
Off-balance-sheet loans and informal banking have been a widely discussed issue recently. What is your view on this?
We are of the view that the panic regarding China’s informal banking exposure has been overstated. While we do not dismiss the possibility that banks may eventually need to write off part of their earnings to unwind the problem, we believe the situation is manageable, and current valuation has factored in most, if not all, of the non-performing loans risk. With the government’s intervention to wipe out underground lending in Wenzhou and other coastal economies, manufacturing businesses with strong balance sheets and larger scale of operations will manage to survive. As part of the economic transformation process, we expect less competitive, low-end manufacturers with thin margins will inevitably face business challenges or bankruptcies. Similarly, local government debt, which was introduced to help local government finance public infrastructure projects, represents a serious fiscal burden for the Chinese government. The estimated local debt of RMB 10.7 trillion is definitely not petty cash, but it is far from a fiscal crisis.
A transition of political leadership in any country is always of interest to investors. There is no exception for China. In 2012, the Chinese Communist Party’s (CCP) leaders are to step down, and a new generation – referred as the fifth generation of political leaders since Mao Zedong – will take the helm. The transition will affect the CCP’s most powerful decision-making organs, determining the makeup of various committees as the core of political power in China. As China’s government body represents the ‘heart’ of the country, the upcoming political reshuffling may inevitably cast an overhang on Chinese equities. In our view, we envisage that the power transition will be a rather smooth one, with the next generation of leaders being conducive to supporting long-term objectives set out by the current leaders.
New leaders continue to maintain balanced growth and social stability
In the early, radical years of China’s economic reforms, the political leaders were highly individualistic, acting as crucial icons that placed strong influences in shaping China’s modern history. For example, Deng Xiaoping, as Mao’s successor, introduced the economic model that enabled decades of rapid growth. His ‘reform and opening up’ policy in 1979 planted the seeds of China’s economic prosperity as a leading global manufacturing exporter. Today, instead of a ruler dominating the decision-making process, political decisions are more guided by consensus, a collective effort, making remote the possibility of a severe change in strategic directions from the current regime. With China’s economic development now on track, we believe the new Chinese leadership emerging from 2012 will not carry out deep structural reforms that would significantly deviate from the long-term objectives set out by Premier Wen Jiabao – that is, to build a ‘harmonious society’ while maintaining sustainable, balanced growth and social stability.
Existing development plans will be reinforced
The next CCP leaders will make their public debut following the 18th National Congress of the Communist Party (NCCP) election which will be held in the autumn of 2012. Regardless of the outcome, we expect the next leadership to continue pursuing China’s long-term economic and political goals laid out by the current leaders. These new leaders, with cross-regional career experiences, understand the importance of delivering greater economic prosperity to the country and the risk of social disruption.
As such, they will continue to implement China’s long-term agenda, such as the 12th Five-Year Plan, by rebalancing demand and upgrading traditional industries, as well as accelerating the development of the inland regions to narrow the gap between the urban and rural areas and between rich and poor. The upcoming leaders have played key roles in outlining the 12th Five- Year Plan. Therefore, the appointment should reinforce the longer-term agenda that is already in place.
Market overhang expected to wane gradually
Looking ahead, we expect to witness a smooth transition for China’s next generation of leaders coming on board in late 2012, following the path created by the current leadership. In the meantime, the political agenda in the following months will spell out more concrete details on the upcoming government’s plans, policy focus, investments and budgets and, thus, gradually remove the market overhang that has shadowed the near-term market sentiment.
Important Information:
This marketing publication is for professional clients and financial advisers only. It is not intended for and should not be distributed to, or relied upon, by the public. All opinions and forecasts expressed are those of the authors as of 30/09/2011 and are subject to change without notice.
Source: ETFWorld – Invesco
