Chinese Data last week Shows continuing Improvement

Economic releases last week out of China showed a significant improvement in the Chinese economy. Pretty much all the data were above market expectations and adds to our thesis that the worst is now behind the Chinese economy. At SBM we have been pointing our readers to this opportunity over the last few weeks months and so our confidence in our bullish stance is further emboldened this week.

On Thursday, three important indicators were announced: industrial production, retail sales and fixed asset investment. All three showed improvements from prior announcement and were above expectations. Starting with industrial production, the report shows an increase of 9.6% in October, the best number in five months and a significant improvement over the last reported 9.2% number.

Industrial production had bottomed in August at an 8.9% growth rate and it is now gathering pace once again. There’s no doubt last year that the numbers were better but still, a recovery is on course. Now looking at retail sales, the latest data for October shows a rise to an annual pace of 14.5%, again an improvement over September’s 14.2% rate and the best number in eight months. Finally, fixed asset investment, the engine of the Chinese economy, grew by a tub thumping 20.7%.

The Chinese government has unfolded various measures this year to give stimulus to the economy, and looking at the reported economic data, it seems the measures are proving successful. The economy is gathering pace and the equity market is carving out a bottom.

Importantly, from a potential easing perspective, inflation is under control. From an annual pace of 4.2% in November last year, CPI is now at just 1.7%, and so offering further scope for the central bank to act if needed. Many economists are now expecting one more additional change in the inverse reserve requirement (RRR) this year but no changes in the key interest rate.

In terms of the Chinese stock market, it has been a bad year, adding to an awful 2011. Last year equities lost more than 20% and are now 6% in the red so far in 2012. We think valuations are too depressed and valuations now at typical bear market lows. With the new leadership regime being announced soon, many new investments will start next year and so fixed asset investment will continue to rise setting the scene for the modest uptick seen recently in Chinese equities to pick up pace.