China: Buy - SAMPLE REPORT
Summary
The Economic Time® is fine, but beware of profitless growth. The government has to keep the place growing in order to create more employment, so talk of "hard" or "soft" landings misses this policy imperative.
The Economic Time™
Monetary Economy:
Inflation started contracting last February and still is. Food deflation keeps decelerating faster than non-food deflation. Because of deflation, the People's Bank of China (PBOC) has allowed the monetary aggregates to keep expanding. Growth in reserve money is still increasing, albeit at 8%. Growth in M1 is the weakest of all the aggregates, while growth in M2 is accelerating. Lending is way below its 2003 peak, but is still barreling along at 22%. Despite the 27 basis point (bp) rate hike on one year loans on 4th May, interest rates remain very low. The yield curve steepened in September 2004 because long rates were pushed up by 80 bp. The RMB's exchange rate will keep strengthening extremely gradually. On a three month monetary policy view, expect the PBOC to raise reserve requirements slightly. But why "tighten" if inflationary pressures remain low? Because Beijing wants to curtail fixed asset lending, which is wreaking havoc with deflation and thus profits.
Real Economy:
Growth is robust partly because the policy mix remains growth-friendly. The PBOC's monetary policy is characterised by "timid tightening", and fiscal policy is expansionary because social security outlays and capital construction are racing along at 40% and 15%, respectively. Although slower since 3Q05, GDP remains robust due to strong private consumption (reflected in rebounding retail sales), fixed capital formation, inventories and exports. Industrial production remains firm, although it has been softening mildly since last June - especially in light industry as well as in collectives and joint ventures. On a three month macro profits view, we are not excited by China's profitless growth: by curtailing fixed assets investment, deflation might stop biting profits as much, and private demand is firming. However, productivity keeps plunging by around 22% and wages are steady at 10%/year, so unit labour costs are rising by 30%+!
Sectors
Strong Buy Sectors
- Textiles, Clothing & Footwear
- Energy
Buy Sectors
- Oil & Coal Products
- Foods & Beverages
Strong Sell Sectors
- Transportation Equipment
- Transportation & Logistics
- Non-ferrous metals
- Metal Products
- Marine Transportation
- Iron & Steel
- Insurance
- Chemicals
Sell Sectors
Hold Sectors
- Communication
- Chemicals
- Air Transportation
