A rebound seems to be underway in the Chinese sharemarket after the big fall this year.
That’s because, as the AMP’s chief economist, Dr Shane Oliver suggests, the economy could be having a soft landing and not the crunch that many investors had feared (as did governments offshore).
If that happens, its good news for Australia, exporters in resources and for the market.
China’s economy is normalising not collapsing.
Contrary to worries about a hard landing, our view is that China’s economy is behaving just as the Government has hoped and growth is simply normalising after last year’s surge.
After the massive policy stimulus of 2008/early 2009 China’s economy surged with growth reaching 11.9% over the year to the March quarter.
Fears of overheating came to the fore with surging property prices in some cities, rising inflation and unsustainable loan growth.
The authorities understandably responded with measures to cool things off.
But it is worth noting these measures were not aimed at simply crunching growth but were highly targeted and aimed at rebalancing the economy as well as cooling it down.
The focus has been on reducing housing speculation, reducing excessive borrowing and investment by local governments, cutting back on industries with overcapacity, while at the same time continuing to boost consumer spending and growth in inland provinces.
As a result, tightening measures have been very selective and have included increasing bank reserve requirements, directives to banks to cut back growth in lending and tighter conditions for those borrowing for second or third homes.
That the authorities are not trying to crunch growth overall is reflected in the fact interest rates have not been increased, fiscal policy has not been tightened and measures to boost consumer spending have remained.
The evidence suggests this has worked and the authorities are now getting what they wanted.
Property transactions have slowed sharply and property prices have stalled since April;
Overall GDP growth has slowed to 10.4% over the year to the June quarter, with the annualised quarterly pace actually slowing to 8% which is down from a high of 14% a year ago;
Fixed asset investment has slowed from an annual growth rate of 35% a year ago to 25% in June and growth in industrial production has cooled;
Retail sales remain strong, consistent with policies to rebalance the economy towards consumption;
Loan growth has slowed sharply from last year’s levels.
Inflation looks to be peaking at around 3%.
So the bottom line is the economy has slowed, bubbly conditions in some cities’ property markets appear to be subsiding and inflation is staying under control.
The question now becomes whether growth will slow too much and end up with a hard landing, particularly with export growth likely to slow over the year ahead as the slowdown in Europe and the US hits.
A further slowing in China’s annual growth rate is likely but our view is a hard landing is unlikely and growth will likely stabilise around 9%.
First
, consumer spending will continue to benefit from policies to boost consumption, with Premier Wen Jiabao foreshadowing further measures to boost consumption in the current half year.
Second, growth in fixed asset investment is unlikely to fall too far given plans to boost the supply of low income housing and measures to upgrade infrastructure in the western provinces.
In relation to the latter, the Government has announced the approval of 23 major infrastructure projects worth 680bn Renminbi in Western provinces.
Third, while the authorities will not rush to ease, our take is that worries about too little growth – particularly as sluggish developed country demand constrains exports – must be playing on the minds of policy makers and will likely lead to some relaxation of tightening measures in the next three months or so.
This may initially be focused on the property measures.
In this regard it is noteworthy recent policy comments have seen a change in tone in favour of “maintaining stable and fast growth.”
What is the Chinese share market telling us?
For many years the Chinese share market told us little – bearing little relationship to the Chinese economy.
But in recent times it has become a good directional barometer of the Chinese economy – falling sharply from October 2007 ahead of the downturn in Chinese growth through 2008, troughing in November 2008 ahead of the growth rebound through 2009 and falling 32% from its high in August last year ahead of the recent slowdown in growth.
More importantly, its swings have increasingly led global share markets – with Chinese shares bottoming in November 2008 four months ahead of the bear market bottom in global shares in March 2009 and the August 2009 peak in Chinese shares leading this year’s correction in global shares.
So while swings in Chinese shares can be exaggerated by the highly speculative nature of its share market and big v
