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Economy: Economy Report of November
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Economy Report

By Andrew Smith

 

WBT201511_030_Economy_-_002This month it is nice to be reporting that although there are still plenty of very real signs of a big slowdown there seems to be some respite in certain key sectors of the economy. At the time of writing the Chinese investment community will definitely be breathing a pronounced sigh of relief. While the Shanghai Composite Index has taken a 23% tumble over the last six months, it has undergone a very mild but much welcomed recovery of almost 4% so far this month. Some commentators are simply seeing this as a sign that the recent crash has hit a temporary plateau. However, there have been reports that another wave of investor confidence is creeping back into the markets. The latest monthly survey by China Securities Investor Protection Funds (SIPF) climbed to 51.3 in September, up 24.2 percentage points from August, underscoring rising optimism among Chinese investors.


In this enlightening survey, 28.2 percent of respondents see the Shanghai Composite on an uptrend in the fourth quarter, while 38.9 percent expect the index to be flat over the final three months of 2015. That is compared to 20 percent of investors who predict further losses in equities. Meanwhile, slightly more than half of the respondents polled by SIPF plan to maintain their stock fund allocations, while 12.3 percent of investors plan to increase their allocation to stocks. Could it be that the doom and gloom is finally over? Well, probably not. "Stocks are still stuck in a mean reversion process," according to Bank of Communications International's chief strategist Hao Hong, referring to a tendency of security prices to return to their averages. He added that, "in a slowing environment with no obvious inflation pressure, bonds are a more obvious choice than stocks. Demand for bonds will likely pick up in the fourth quarter due to still cautious market sentiment and the search for yields.”


Part of the reason for this apparent return of confidence could be that the institutional investment community are betting on some further stimulus measures from the central government and/or the People’s Bank of China (PBoC). Reporting in the South China Morning Post, Brendan Clift pointed out that, “hopes are high for more official measures to boost the country's economy after the Communist Party said it would be holding a key meeting from October 26 to 29 to map out the 13th five-year plan. The meeting comes as the nation's economic growth slows and speculation mounts over whether party elites will unveil new measures to boost growth or downgrade the official gross domestic product target, currently set at 7 per cent. A Politburo statement said the plenum would develop a strategy for building a well-off society and set the direction for the nation's socioeconomic development.” It is still unclear at this point in time what further stimulus action would look like. If intrinsic weakness persists throughout the last quarter of 2015 then the likelihood is that we will see further cuts to the Reserve Requirement Ratio (RRR) before the end of the year. And while it is far less likely given the current public debt situation, there is always a chance of the central government ramping up GDP growth by investing in huge infrastructure projects like it famously did in the years following the 2008 financial crisis. Either way, investors are seemingly ready to pounce.


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In addition to the improved performance of the financial markets, certain industries that cater to the needs of China’s growing pool of middle class consumers are still doing well. We recently learned that retail sales increased by about 10% in the three months leading up to August, showing that some consumers are still shrugging off macroeconomic circumstances. One such example of this is the sportswear market. According to Fortune’s Michal Addady, “Nike, the country’s most popular sportswear brand, saw sales increase by 30% to USD 886 million. The country’s best-selling local brand, Anta Sports Product, had a sales growth of 24%, and a less prominent local brand, Xtep International, saw sales grow by 12%.” The reason for this, he says, is that more sporting events are taking place in China and marketing campaigns aimed at tapping into the country’s increased spending power are proving to be highly successful.

 


Start-up companies also seem to be doing well at the moment. Xin Guobin, Vice Minister of Industry and Information Technology told the press last month that thanks to the government’s recent policies to boost entrepreneurship and innovation there are now around 10,000 start-ups a day popping up around the country. Lending to small companies, he suggested, is set to increase substantially over the course of this year. Many of these new firms are undoubtedly taking advantage of strong sectors like retail and the booming e-commerce market.

Unfortunately, although it was largely to be expected, the imports and exports data has shown a further contraction. The official statistics for September showed a 20.4% drop in imports during September, while exports also plunged by around 3.7% from the previous year. Economists polled by Reuters had forecast imports to fall 15 percent, following a 13.8 percent slide in the previous month, and exports to decline 6.3 percent, after a 5.5 percent decline in August. "Given the slight recovery in commodity prices, the decline in imports suggests sluggish domestic demand – in particular, investment demand," said Yang Zhao, China economist at Nomura. The 20.4 percent drop in imports is the biggest monthly decline since February.


Not surprisingly the manufacturing sector also continued to contract. Although the Purchasing Managers’ Index (PMI) rose to 49.8 in September compared to 49.7 in August, it still indicated shrinkage in overall output. Analysts are suggesting that this could weigh heavily on the GDP figures. "Two straight months of manufacturing sector contraction with a depressed equity market suggests China's third-quarter GDP growth is likely to have slowed to 6.4%," economists at ANZ said.


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External factors are, of course, just as much of a cause for concern as they have been throughout the Chinese economic slowdown. Everyone knows that the weak export data is largely due to persistent weakness in developed markets – particularly Europe. Now there is another potential shockwave lurking on the horizon: the raising of interest rates in the United States and elsewhere. The pessimists, most notably the IMF, have been saying that while the time is right for a slight rate hike by the Federal Reserve it will have some consequences on emerging market economies which have racked up dollar-denominated debt and are prone to capital outflows. China is perhaps better prepared for such an outcome than other nations but there is still some cause for concern as both the current U.S. interest rate cycle and the global economic situation are somewhat historically unprecedented. This may explain some of the reasoning behind Chinese Finance Minister Lou Jiwei’s recent assertion at the annual World Bank and IMF meeting in Lima that conditions for a Fed rate increase are still not optimal. He said that, “the US economy has benefited from the position [of the US dollar] in the global currency system, and has revived relatively faster…The U.S. should bear more global responsibility and is not yet in the condition for an interest rate hike.”

 

 

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