Chinese Economy Decelerating Gently - Barrons.com

 

International Trader - Asia

 | SATURDAY, JULY 3, 2010

Toward a Soft Landing in China

By LESLIE P. NORTON | MORE ARTICLES BY AUTHOR(S)

Newest economic numbers show the Asian nation in a controlled slowdown.

 

JITTERS ABOUT THE STATE of China's economy and its impact on global growth came to the fore last week, triggering a nearly 7% slump in Shanghai shares. The week began with a revision of the Conference Board's leading economic index for China for April, as a data-calculation error led the Conference Board to change the reading to 6.8%, from an original 9.9%.

The new reading was consistent with the previous number, and was followed by the June Purchasing Managers Index: The official number clocked in at 52.1, down from 53.9 in May; meanwhile, the HSBC PMI statistic fell to 50.4 from 52.7. (Above 50, the economy is expanding; below, it's contracting.) China has been tightening credit with a raft of measures, including increased bank-reserve requirements. China's economic growth peaked at 11.9% in the first quarter.

Ugly: It was a miserable week in Asia, too, as the yen gained strength, worrying exporters.

Is a hard landing in the cards? HSBC analysts Hongbin Qu and Junwei Sun say such fears are "overplayed." UBS, for example, kept its gross-domestic-product growth forecast for China at 10% for 2010 and 8.7% for 2011. One bright spot: Reviving consumer confidence. For now, a third-quarter rate hike from Beijing seems far less likely.

A soft landing is consistent with the findings of Lakshman Achuthan of the Economic Cycle Research Institute (www.businesscycle.com), who maintains four different leading indexes for China. ECRI's export index, with a six-month lead time, has been plunging since its September peak. The Chinese industrial production leading index, a broader measure, with an eight-month lead time, peaked in November, and has been declining, too, but less dramatically. The leading index (seven months) topped in November, but is showing "a more gentle throttling back of growth." Finally, the leading home-price-index growth rate, with an 18-month lead time, peaked in April '09, but merely shows "a moderation in the growth of home prices." Still, Achuthan adds, "the bottom won't be until the leading indicators turn back up."

Constance Hunter, chief economist of Aladdin Capital, a boutique investment bank, notes that the PMI is closely correlated with China's stock market. "If China has a hard landing, it means the government has lost [its] grip on the economy," says Hunter. That hasn't happened yet. "If we get a soft landing, the PMI fluctuates between 48 and 52. Then equities will probably stop falling."

The trough for Chinese equities has been hard to find. You can also blame cash calls and the giant initial public offering of the Agricultural Bank. Christopher Wood, the Asia strategist at CLSA Asia Pacific Markets, notes that some A shares now trade "at unprecedented discounts" to their Hong Kong-traded counterparts; in the past they've traded at steep premiums. The yuan-denominated A shares are traded by locals; H shares are mainland companies listed in Hong Kong. Midway through last week, notes Wood, the A shares of China Merchants Bank (3968.Hong Kong), Anhui Conch Cement (0914. Hong Kong), Industrial & Commercial Bank of China (1398.Hong Kong) and China Life (LFC) traded at 21%, 19%, 19%, and 18% discounts to their H shares.

Writes Wood: "A big opportunity is building here, if and when [China] reverses its current tightening stance. The best chance of that happening sooner than investors currently expect is if the Standard & Poor's 500 breaks down in a new wave of euro-land-led risk aversion," signaling "that nominal GDP in the Western world is going to be lower in 2011 than it was in 2010."