Monday, December 10, 2007

Decoding China's Pulse

Important Chinese bigwigs at a just concluded economic conference identified five major problems in the national economy in a bid to better steer the country's economic growth in the coming year. The three-day Central Economic Work Conference that ended on Wednesday cited overheating risks, inflation pressure, a weak agriculture sector, arduous energy conservation and emission reduction tasks and prominent issues on welfare of the general public as key concerns of Chinese authorities.
It emphasized that it would be of great significance to properly guide the national economy in 2008, which is the first year for China to implement policies mapped out at the 17th National Congress of the Communist Party of China (CPC), during which the country's new leadership was selected.
China will host the Olympic Games in August next year, for which the government is going all out in preparation to guarantee the success of the major event.The meeting has also outlined policies to be adopted to ensure problems could be properly solved, such as the prevention of overheating economy and guarding against a shift from structural price rises to evident inflation.
Overheating Risks - A liquidity issue which channels itself into property and stock markets. To rein in these risks is very difficult. Beijing have been raising bank's reserve requirements and stopped banks from lending till end 2008.

Inflationary Pressures - Another liquidity issue. Can be combated by subsidy from the government or price controls.

Weak Agriculture Sector - A planning problem.

Energy Conservation & Emission Risks - Putting in measures which would eventually lead to more rules and regulations, thus increasing the cost of doing business - but a desired development.

General Public Welfare - General workers salaries not catching up fast enough with prices, and the still troublesome unemployment in more remote areas of China. Another planning issue.

We have to remind ourselves that although most of us know China intimately through their stock markets, the authorities have larger fishes to fry. Just because we view their stock marets with "importance", listed equity is still a small proportion of the real economy. If there is no overheating risks, they would certainly do nothing to stop Chinese equity markets from rising further.

Their property markets have been subdued somewhat, as these larger committments are easier to control via fiscal measures. Stock markets are more difficult to rein in as funds can move in and out.

Looking at the above factors, chances are this is only a temporary pause for the bull run because liquidity is still intact. As companies keep churning out decent results, it is likely to reignite the market's run. Raising the reserve requirement stems the banking side, but liquidity is already there. Raising bank lending rates also will hurt property side more but not stocks because the gap between deposit rates and BLR is still too wide, about 4 percentage points. Unless that gap is about 2 percentage points, only then will hikes in BLR attract real funds into deposits and away from stocks. Hence the hike in interest rate over the weekend is rather a non-event, in fact it could prompt some to re-enter the equity markets because another hike may be a few months away.

Beijing still have many fiscal measures it could implement if things really get out of hand - such as raising transaction fees or even taxing capital gains. These measures are not likely to be implemented till maybe the all time highs have been breached again. Hence on balance, the bull run should continue soon and things should be "safe" at least till it nears their all time highs. China dolls, come to papa ...
( but watch those expiring in 2-3 months time, and get out when time to expiry is near)

CCCC-C3 0.23
CCCC-C4 0.16
China Life-C3 0.17
China Life-C4 0.48
China Merchant-C1 0.12
CNOOC-C1 0.36
Chalco-C1 0.14
China Construction Bank-C1 0.12
Shenhua-C1 0.37


China Mobile-C5 0.51
China Coal-C1 0.13
ICBC-C4 0.23
Petrochina-C4 0.43
Sinopec-C2 0.17
Sinopec-C3 0.15

1 comment:

wqlq said...

sifu dali, china cw getting hit badly *sigh* any hope of seeing bottom yet?