Mark Mobius: Riding the Chinese Ox
Further to my recent articles on China (“China – better days ahead” and “China – rising to the occasion“), a few comments from Mark Mobius, executive chairman of Templeton Asset Management, have just arrived.
“On February 4, China and Chinese all over the world celebrated the entry into the Year of the Ox. We would prefer to call it the Year of the Bull because we believe that 2009 will be the year that the emerging stock markets should witness a substantial recovery and China should lead the way to that recovery.
“The investment prospects and long-term outlook for China are excellent for a number of reasons: (1) the Chinese leadership is intelligent, resourceful and enlightened, with an interest in maintaining growth with a better standard of living for all Chinese, (2) that leadership has the organizational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world, (3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves and (4) China has one of the healthiest banking systems in the world and most individuals have little borrowings.
“Undoubtedly, China will not be able to achieve the double-digit growth of 2008 but it can certainly achieve high single-digit growth. In order to maintain growth, the government is undertaking a number of massive stimulation programs targeted at the domestic market, which is designed to replace export-led growth by the domestic market-led growth. The key driver therefore will be domestic consumption. The government is also taking measures to boost consumer spending by tax cuts and consumption coupons. Therefore, any sector related to domestic consumption will be favorable. China’s economic growth is expected to be driven predominantly by fiscal stimulus and monetary easing.
“Since September 15, 2008, the People’s Bank of China has cut lending interest rates by 216 basis points (2.16%) with additional cuts expected. In order to stimulate bank lending, the reserve requirement ratio for banks was lowered four times and loan quotas, which were designed in 2008 to restrain banks from lending, will probably be unofficially abandoned.
“Inflation eased to its lowest level in more than two years, with consumer prices increasing 1.0% y-o-y in January. With strong declines in inflation, policy makers in China have become more confident and have been cutting interest rates aggressively. One of the constraints to inflation has been the crunch in trade financing, which became a global problem, but as a result of new support from Beijing this problem seems to have eased.
“The Chinese currency, the renminbi, is currently undervalued on a price parity basis. There is thus pressure for it to strengthen against the US$. However, the Chinese are concerned about further erosion of export businesses and thus are proceeding cautiously regarding any further appreciation. Structurally, this would be a good opportunity for China to introduce further reforms on the opening of its capital account and currency convertibility. With the renminbi taking a bigger role in the international market, it could become another reserve currency after the US$ and euro.
“In November 2008, the government announced a stimulus package and should be able to spend up to RMB4 trillion (or US$586 billion) in new investment programs. The package is scheduled to be spent before the end of 2010 in ten key areas, including transport infrastructure, rural electricity and gas facilities, low-rent housing, agricultural subsidies and minimum income support.
“There are also other supplementary programs geared towards promoting incomes and consumption. Funding is certainly not a problem for the Chinese government as the government is in fiscal surplus and has the largest fiscal reserves, currently at US$1.95 trillion, in the world. Moreover, given the high savings rate and low loan-to-deposit ratio with the banking system, there is ample room for the government to raise debt.
[PduP: The Chinese FTSE Xinhua Bank Index has certainly been the best-performing banking sector of any country over the past few months as seen from its performance versus the S&P 500 Financial Index, although US financials have started making amends over the past two weeks.]
“There are now signs of recovery in the China economy with the government’s infrastructure projects beginning to have an impact and as the Purchasing Managers new orders index rebounds. The December PMI rebounded to 41.2, 2.4 percentage points higher than the previous month, which represents the first meaningful rebound since March 2008.
“The current 2009 GDP growth forecast for China is 7.4%. The fiscal stimulus and interest rate cuts are expected to have a continuous positive impact. Of particular interest is the rise in orders for infrastructure-related material and machinery orders. This reflects the effects of the government’s fiscal stimulus measures. There are indications that the slowdown in China’s industrial production growth is showing signs of recovery with new orders, input prices and even new export orders recovering from their lows. Moreover, stocks of major inputs and finished goods are stabilizing.
“There are, of course, risks in Chinese investing. Currently unemployment is on the rise and labor activism is increasing. Therefore there are risks of disruptions, which could impact stock prices. While the official unemployment rate was just 4%, it is believed the actual number could be as high as 10%, with most unemployed being migrant workers in the coastal areas and new college graduates. Compared to the last down-cycle, the government now has greater fiscal strength to handle the situation. Farm ownership reform and wider social security coverage will help ease the impact on social stability.
[PduP: The risks are plentiful as pointed out in this report by George Friedman of Stratfor. However, the authorities are mindful of the declining world trade and are using their enormous firepower to counter the reduced exports.]
“The benefits, however, far outweigh the risks of investing in China and as the fastest growing major country in the world with the largest population, clearly China must be an investment destination for any intelligent investor.”
[PduP: In conclusion, an updated chart of the Chinese Shanghai Composite Index that seems to be mapping out a rather bullish pattern notwithstanding concerns about the command economy's ability to successfully compensate for reduced global trade with domestic demand. Some may argue that the stock market is being manipulated, but such action, if true, can at most be a temporary phenomenon. Charts seldom lie over the longer term and with the Index above the 40-week (200-day) moving average and the rate of change (ROC) indicator (black line in the bottom section) on the weekly chart above zero, depicting a positive trend, the Chinese Ox (or should I say bull) appears to be in control.]
Source: Mark Mobius, Templeton Asset Management, February 2009.
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