Thursday, March 22, 2012

Bracing For China's Hard Landing?

Scott Murdoch of the Australian reports, Manufacturing squeeze raises fears of sharp China slowdown:
GLOBAL investors are increasingly worried that China is facing a major speed bump, after its economy showed renewed signs yesterday that it is slowing down.

The HSBC Purchasing Managers Index fell to 48.1 in March, from 49.6 in February, in the fifth consecutive monthly contraction.

The result, which sent the Australian dollar sharply lower and caused Dow Jones index futures to fall, was interpreted by financial markets as a clear sign that China's manufacturers were struggling and the nation could face an export earnings hit.

The People's Bank of China has eased monetary policy three times in recent months in a bid to inject stimulus back into the world's fastest-growing economy.

There had been speculation in financial markets that yesterday's result might have moved back into positive territory. The negative result prompted a sharp reaction on the markets as investors feared for the future of China's economy.

The Australian dollar slid from $US1.0474 to $US1.0378, its lowest level in two months, but recovered slightly to $US1.0406c as it found support in the international foreign exchange sessions.

The S&P/ASX 200 did not waver, however, closing 19.4 points higher at 4237.7.

Deutsche Bank currency strategist John Horner said the dollar was sensitive to shifts in market sentiment towards China.

"I think we are seeing a slowdown in China and, while it's not a hard landing yet, it's not as soft a landing as most people hoped," Mr Horner said. "The policy easing that there has been has so far been very targeted rather than the broad-brush action we saw in 2009 and 2010.

"What we have seen in the inflationary pressures and the rhetoric from the Chinese policymakers suggests that major policy easing is a little while off."

Rochford Capital director Derek Mumford said the Chinese data added to the uncertainty facing the broader global economy.

Mr Mumford said sentiment had started to improve with glimmers of hope appearing over Europe, but traders were still wary.

"It was weaker than expected, it wasn't pretty with total exports down and internal consumption was down," he said.

"That shows that the domestic economy is nowhere near ready to take on the role that the export markets have had. It is still very reliant on export markets."

Shen Jun, a Shanghai-based analyst at BOC International, said: "Investors are already pessimistic about the economic outlook and the just-released weak PMI data has raised more worries."

The latest PMI result marks the fifth month it has remained in contraction since reaching 47.7 in November last year.

"Growth momentum could slow down further amid a combination of sluggish new export orders and softening domestic demand," HSBC's chief economist for China, Qu Hongbin, said.

"This calls for further easing steps," he added.

Goldman Sachs is forecasting that China will cut interest rates twice this year, although the US-based global investment bank said this would not happen immediately.

"While an interest rate cut is not imminent, the need to do it and the likelihood for it to happen has significantly increased recently," it said.

Bloomberg reports that China's economy is already in a "hard landing," according to Adrian Mowat, JPMorgan Chase & Co.'s chief Asian and emerging-market strategist:
"If you look at the Chinese data, you should stop debating about a hard landing," Mowat, who is based in Hong Kong, said at a conference in Singapore yesterday. "China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It's not a debate anymore, it's a fact." His team was a runner-up for best Asian equity strategists in a 2011 Institutional Investor magazine poll.
It's not a debate, it's a fact? If this is the case, all 'hard landings' should be so soft. Just ask Robert Hsu, the editor of the China Strategy and Asia Edge newsletters:

Hsu spends as much if not more time researching China's economy than just about anybody, and he does it by actually going to, and doing business in, the country. I'm a big admirer of Hsu's views on the markets and the economy, particularly when it comes to China.

While Hsu does acknowledge that some of China's metrics are signaling a slowdown in growth, he doesn't think the slowing fits the "hard landing" description. Remember, a hard landing is generally defined as a sharp and sudden deceleration in growth, and in this case Hsu says it is neither sharp nor sudden.

"At the heart of the hard landing argument is the recent lowering by the Chinese government of its full-year growth target from 8% to 7.5%. However, China is great at tempering expectations and then exceeding those expectations when the time comes," Hsu told me.

He added: "In the past, China has come out with growth forecasts that they knew were well below what they could actually achieve. For example, Chinese Premier Wen Jiabao said in 2011 the Chinese economy would grow at an annual rate of just 7.5% for that year. He was wrong. In fact, China's GDP grew 9.2% last year."

Hsu doesn't expect China to grow at the pace it has in prior years, but he does think it will achieve an 8% GDP growth rate in 2012. Moreover, he thinks the hard landing scenario is pure fiction. "The fact is that China is still building; Chinese incomes are still rising; China's consumers are still gobbling up luxury retail goods; still buying loads of high-tech toys; still going to movies in record numbers; and still buying health products like never before," said Hsu.

I agree, the "hard landing" scenario in China is pure fiction and investors fearing the worst will underperform in 2012. I think what's going on now is a classic shakedown to rid the weak hands out of the market and out of resource stocks (as well as some end of quarter window dressing).

Those of you wanting to read more on this subject should read this Seeking Alpha article on the Chinese hard landing as well as this Guardian debate on whether China should be bracing itself for a hard landing.

Below, Xia Bin, a researcher with China's State Council's Development Research Center and a former adviser to the nation's central bank, talks about the country's economic outlook. Xia said China won't see a steep slowdown in its economy in part because many local governments are still targeting annual growth above 10 percent. He spoke with Bloomberg's Susan Li in Hong Kong at the Credit Suisse Asian Investment Conference.

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