China’s Economy Returns to Leading Asia Recovery

July 10, 2014

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The slowdown in China’s economy, which in the first half had been one of the negative factors affecting the global economy and equity markets, appears to have come to an end, with Chinese manufacturers reporting an improvement in business conditions in June, the first improvement since last December. Demand is strengthening and destocking is accelerating. Growth in the service sector is the fastest it has been in over a year. GDP growth of 7.4 percent for the year now looks attainable, picking up to a 7.6 percent rate in 2015.

These growth rates for China will again lead the world, with only the Asian economies of India (with 5.2 percent growth projected for 2014 and 6.4 percent projected for 2015), Indonesia (5.3 percent and 5.4 percent, respectively), Malaysia (5.0 percent and 5.2 percent) and the Philippines (6.3 percent and 6.6 percent) coming close. Taiwan’s economy, with projected growth rates of 3.7 percent for 2014 and 4 percent for 2015, registered the region’s highest manufacturing Purchasing Managers Index (PMI) in June. Even South Korea, which had the lowest PMI in the region for June, looks likely to achieve growth rates of 3.7 percent and 4.0 percent over this year and next. The recovery in China and the anticipated quickening pace of the US economy are contributing to this revival of the Asia region, which will continue to outpace Latin America and Central and Eastern Europe.

The shoring up of China’s growth is policy-driven. Infrastructure investments have been accelerated. The central bank, the People’s Bank of China (PBoC), has cut the reserve requirements for some banks and is injecting funds into the economy, reversing the more restrictive policy stance followed earlier in the year. Liquidity tensions in the interbank market have eased, but risks remain in the banking system as the PBoC moves to restrict lending to the shadow banks.

Investors in China equities suffered earlier this year. The MSCI China Equity Index declined by 8.04 percent over the first four months of 2014, a period when the comprehensive MSCI Emerging Market Index was off by only 0.74 percent. Investors, sensing a turnaround in the Chinese economy, pushed the Chinese equity index up 4.03 percent in May and an additional 1.86 percent in June. Valuations remain relatively attractive, with price/earning ratios the lowest in the region.

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Starting in October 2014, restrictions on investment flows between Hong Kong and Shanghai are scheduled to be lessened in a pilot program, Shanghai-Hong Kong Connect, which will create for the first time a feasible, controllable and expandable channel for mutual market access between the Mainland and Hong Kong by a broad range of investors. This program will mark yet another step in the slow but deliberate opening up of China’s capital account and internationalization of the renminbi   and will be a plus for China equities. (Note that “renminbi” is the official name of the Chinese national currency. The often used term “yuan” is the name of one unit of the renminbi currency.)

 

The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding has been reposted with permission of Cumberland Advisors. The original commentary is available at http://www.cumber.com/commentary.aspx?file=070914b.asp.

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