China In Cyclical Slowdown Or Hard Landing?

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There is an increasingly animated debate amongst economic commentators as to whether China is preparing for a hard landing or is currently experiencing just a natural cyclical slowing before regaining new growth momentum into 2013. While Europe struggles to grow and the US throws everything it can in terms of monetary policy at its economy to keep the embers burning, China is still growing at 7.6% a year. Is China really struggling or is the press just overstating the effects of a slowdown in growth?

According to many analysts, China is about to endure hard landing as growth is no longer at the level of the boom years. Recent economic data points to a slowdown in manufacturing, domestic retail, and, worst of all, in exports – the engine of the Chinese economy. With an unfavourable global economic situation, analysts are now downgrading China’s stats for 2012 & 2013.

It is true that economic data has been pointing to a slowdown but this is more a side effect of government’s policy and as we detail in the latest edition of our magazine where we weigh up the bull & bear arguments for China (Link here, page 44 – The People’s Bank of China has been applying a more restrictive monetary policy to bring down inflationary pressures, being concerned with a bubble that was forming in the housing market and in fact, so effective has this policy been that they have been able to push inflation down to 2%, while keeping growth at a healthy growth rate of 7.6%. They have been selective in the application of additional measures to boost growth and now have plenty of leeway to fan the flames of the Chinese economy without igniting inflation.

Some analysts are still waiting for the Chinese government to approve a package of economic measures to add stimulus to the economy and for the central bank to engage in some modest monetary easing to boost growth. This is likely imminent and the fiscal measures unveiled last week of some £150bn are just the start.. Prospects for the Chinese economy aren’t as good as they may have been in the past but they aren’t as bad as the press has been pointing to lately.

The Communist party will hold a congress in a few weeks when local and national government officials will be changed. A new period will therefore start and many new investments will be unfolded as the new elected members will try to show results. In the latest issue of our magazine, we analysed this situation extensively

Over the last few days, the Chinese stock markets have been edging higher as the government has been accelerating measures to support the equity markets that have been in a deep slump this year and additional measures will certainly come over the next few weeks/months. The SSE composite has been penalised in a greater way than European and US equity indices, showing a 7% YTD loss and accumulating significant losses over the last three years. Nevertheless, China continues to present better growth prospects than other markets and its stock market is currently oversold.

Over the last few days a sovereignty conflict between Japan and China has been growing. The two countries dispute the ownership of the Seukaku/Diaoyu islands. The Japanese government has bought the islands from a private owner but the Chinese say those islands are part of the Taiwanese territory. Anti-Japanese demonstrations over the last few days have resulted in export losses for Japan, and in production cuts in Japanese companies inside China. Japan is the third largest foreign investor in China. If the conflict continues both countries may be hit additionally than the problems they are each currently facing.

Setting apart the rising conflict over the islands that has been understated in the press, we still think the Chinese equity market is set to take off and in our magazine suggest ways to play this absent a clean Chinese index spreadbet play.

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