Pockets of opportunities in the uncertain China market
One way to make money in financial markets is to bet on unanticipated events, but these days surprises can be hard to come by.
Only a few decades ago, the Federal Reserve used to make its monetary decisions in secret, informing the market weeks later. Nowadays the Fed, like the European Central Bank, telegraphs policy adjustments well in advance. It’s like the “jazz hands” version of monetary policy: try to act noiselessly, so as not to upset those economic actors who may suffer trauma.
Japan occasionally attempts surprises, like the laying on of another gazillion trillion yen in quantitative easing unveiled earlier this year. But after two decades of virtual zero interest rates, and more than three years of Abenomics’ turbocharged quantitative easing (QE), it’s hard for the Bank of Japan to produce any more shock and awe.
This leaves it up to China to offer the excitement of the unexpected, such as last August’s world-shaking devaluation of the yuan.
The latest cause for uncertainty is a lengthy May 9 interview in the People’s Daily newspaper with an unnamed “person of authority”. This person averred that excessive debt levels are economically risky, and that China should shut down excess capacity rather than adding more. That same point has been officially declared in many instances – it is line with President Xi Jinping’s “supply side” reformist agenda – yet it clashes noticeably with the actual trend of hefty credit expansion.
The authoritative person let it be known that China is not interested in pumping up economic growth rates to the previous speeds. Flat growth was good enough – an L-shaped recovery.
But it was not all that clear if the L plateau begins at current levels of growth, or after the further downshift in growth also hinted at by this high-level inside source. Last year the Chinese economy added about 4 trillion yuan in new output, to take the total to 67.7 trillion yuan, but that was with the boost of 16 trillion in additional financing. Can flat growth really occur with “little stimulus” as the source says?
Such mysteries give China strategists more raison d’etre than financial pundits elsewhere in the world. Many investors will be asking China watchers: who is this “authority”? Likely he or she represents the view of Xi or someone close to Xi but the secrecy part is odd, giving the impression of an imperial loose canon.
“We think this interview indicates that there are different views in the government about current policies and the senior leadership has signalled the desire to correct the impression that the government has scaled down reform in exchange for more leverage to support growth,” economists Tao Wang and Ning Zhang of UBS said in a note to clients.
“The recent rebound,” they added, “has been led by stronger policy support and property activity, which increases medium-term debt risk. We also thought policy easing has peaked in the near term, which would seem to be further confirmed by [last week’s] interview.”
Bank of America Merrill Lynch strategist David Cui also says the People’s Daily interview points to tightening credit conditions and less abundant mortgages. This will lower demand for commodities and raise default risk and pressure on the renminbi over the next few months.
Yet on the same day as the L-shaped leak, the National Development and Reform Commission, China’s state planning body, announced what HSBC called a “quiet stimulus package”.
Based on the detailed release of upcoming transport-related projects, HSBC estimates an incremental investment of around 700 billion yuan over the next two years – 8 per cent above the bank’s current estimates. Subways should get half the increased investments, but airports will not do too badly with another 220 billion yuan tossed their way.
HSBC thinks the best plays in the fixed-asset investment sector include China State Construction International Holdings, Lonking Holdings and Zhuzhou CRRC Times Electric Company.
It is possible we may have a situation where metals speculators will be scared out of the market – there was a recent clampdown on “excessive speculation” – presenting constructors with low-input inflation growth (expanding profit margins) on the back of targeted stimulus. These are the strangle pockets of opportunities that can present themselves in this over-administered, uncertain and surprising market.
Cathy Holcombe is a Hong Kong-based financial writer