- Chinese growth in Q1 and Q2 will be less than official economic indicators may have us believe
- US$ strength is here to stay and will have adverse effects on Chinese growth rates in the future, though we do expect a pick-up in Chinese growth in H2 this year due to external factors
- Pegged Emerging market equities will underperform Developed markets going forward
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Economic indicators outside of the official Chinese GDP are indicating that economic growth has slowed to levels seen in mid-2012 i.e. before the policy-driven rebound took effect. Though the Chinese New Year can distort statistics to a certain extent we think it wise to mention our analysis at this time. Our analysis illustrates that Q1 data may come in below the Q4 growth rate of 7.9% yoy.
Trade volume going through China's seaports is rising, but at a noticeably slower rate. Growth in transport numbers are subdued and a big slowdown in electricity output growth (which more than halved in yoy terms in January and February compared to December). Overall this points to a slowdown in heavy industry, travel and tourism as well as goes a few steps to explaining the subdued equity price growth vis-a-vis the USA. With a fearful eye on inflation the government will be reluctant to increase credit expansion given their efforts to reduce the massive expansions of the past in the construction and housing industry (with a peak in property starts this year).
Additional items about the Chinese economy that the equity markets do not like:
- Real effective exchange rates are showing us that the Chinese currency is in fact one of the strongest currencies out there and is getting stronger.This is not hard to envisage in a world where nearly all major countries have and are continuing to inject huge monetary stimulus into their economies and the US$ is appreciating (Yuan is pegged to the US$). This is impacting exports negatively and also assisting in a slowdown of Capex inflows.
- Huge capital inflows in the past have caused mal-investment and over-investments which are now causing EBIT margins to narrow, again something the equity markets do not like.
- Government policy has already done supportive actions in mid-2012 and are probably unwilling to do more in the short-term.
Overall, we here at Archbridge Capital believe that China is going to continue growing and be one of the growth engines for the world, but that this growth rate will be subdued in the short term and only begin picking up in the second half of the year with external factors assisting, such as European economic recovery and a faster growing US.
The key hinderance going forward will be the strengthening US$ which should cause all pegged emerging markets to experience some discomfort. China is simply not ready to compensate for a slowing export sector with its internal demand, hence though Chinese growth will be in acceptable levels it will be lower and it may not be the same benefactor to commodities as it once was.
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