Quantitative Easing

China markets poised for recovery if US initiates third liquidity injection

PUBLISHED : Thursday, 06 September, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 2:05pm

Mainland markets are bottoming out and poised to be awash with fresh capital if a third round of quantitative easing by the US Federal Reserve begins in the fourth quarter, HSBC said.

"The fear of China heading for a hard-landing is overstated," said Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management.

The Shanghai Composite Index dropped 0.3 per cent to 2,037 points yesterday, the lowest since February 2009.

"The corporates in mainland China are in a decent state while some comments about the nation's bad debt problems are exaggerated," Poole said, adding it is unlikely the mainland's gross domestic product will fall below 7 per cent, the threshold at which the economy will either have a soft or hand landing.

Concerns about bad debts arose amid an investment spree adopted by Beijing in 2009 to shore up the economy due to the global financial crisis.

"China's efficiency of investment has deteriorated but is still better than most other countries," a report by Goldman Sachs released on Monday said. China's leverage was allowed to continue growing for too long and is now far more of a constraint on growth, it added. Risks were rising on both the credit and investment efficiency fronts.

Clouded by doubts about investment efficiency, the valuations of mainland stocks have fallen to a level that is more undemanding than that of Italy and Spain, which are at the centre of the euro-zone debt crisis. HSBC data showed that mainland stocks are trading at approximately 0.7 times to their projected earnings on average over the past five years, as opposed to 0.9 times for Italy and Spain.

Poole thinks mainland companies are heading for better times as its earnings are not deteriorating any further. The implementation of QE3 would inject more liquidity in the capital markets and more capital will flow into the mainland in anticipation of a recovery.