China Eyes Slowdown Options

By KOPIN TAN | MORE ARTICLES BY AUTHOR

To Asia's leading economy, a cooling of global growth may come as a relief. And even better, its equity markets have already priced in a dip.

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Chinese stocks have surrendered more than a quarter of their value since last November―including 15% last quarter alone―to plumb depths not seen since the 2008 financial crisis. Clearly, investors fear that China's export-reliant economy will shrivel as Western shoppers scrimp. In the 2008-2009 global recession, for instance, Chinese net exports fell 40% year-over-year, slashing a hefty five percentage points off the growth in the country's gross domestic product. But the past isn't always prologue, and fears of another hard landing may already be amply factored into share prices.

Make no mistake: China must deftly navigate several challenges. Massive bank-funded investments helped shorten its last recession, and now "nonperforming loans will undoubtedly increase in response to the banking sector's exposure to some $1.7 trillion in local-government debt," says Stephen Roach, nonexecutive chairman of Morgan Stanley Asia. But Chinese banks, with loan-to-deposit ratios of just 65%, should have enough liquidity to absorb losses.

Also likely to help the economy: More than 310 million people are expected to migrate to cities over the next two decades, helping to absorb any surplus housing inventory. And the government has moved forcefully to curb real-estate speculation, raising down payments to 50% for second homes and more for third. Prices in 46 of the 70 major cities show property inflation starting to cool.

Unless Europe implodes, "there is good reason to hope for a soft landing to around 8% in GDP growth," Roach writes. Such a breather could bring "welcome relief" for a nation long vexed by rabid resource consumption, labor-market bottlenecks, excess liquidity and rampant inflation. It also could help the government's effort to encourage more domestic consumption.

Last week, HSBC cut its forecasts for many Asian markets, particularly trade-dependent Korea and Taiwan, but China was a notable exception. Chinese growth has become less export-driven, argues Hongbin Qu, HSBC's chief China economist, with net exports accounting for 2% to 3% of GDP in 2010 and 2011, down from 8% to 9% before 2008. If the world slips into a global recession again, net exports would cut China's growth by one to two percentage points this time, Qu says.

Beijing also has been constricting credit to slow growth and fight inflation. That tightening regime likely is near an end, and the government has options if it decides stimulus is now required. To soften the blow of a global recession, Qu thinks "all Beijing needs to do is tweak fiscal policy, rather than to replay the massive 2008-09 stimulus package."

THE PUMMELING OF RESOURCE STOCKS hasn't spared oil producer Cnooc (ticker: 0883.HongKong). Its shares have slid nearly 50% in six months, to just above HK$11 (US$1.41) midweek. In fact, Cnooc is within 15% of its 2008 trough valuation, even though Brent crude oil is roughly US$60 a barrel higher today. Credit Suisse expects Brent crude to hover near $105 a barrel in 2012 and remain above $90 in the longer run, but Cnooc shares seem to be pricing in oil below $70.

The firm expects production to rise 12.5% in 2012 and sees robust reserve additions. "Cnooc appears to have refocused on longer-dated organic, larger-scale, value-accretive projects―specifically the domestic deepwater and unconventional gas plays," notes analyst David Hewitt. His price target: HK$16.60. 

Aussie Win

Australia led the gainers in a mixed week for Asian markets.

E-mail: kopin.tan@barrons.com