The latest figures certainly suggest that China has picked up the economic pace again. Its most recent PMI manufacturing figures, for instance, show a modest improvement, while the gap between new orders and inventory (a bellwether of future output) has widened. A further fillip for China is improving growth in the US, now its biggest destination for exports.
But investors should treat the latest figures with a degree of caution. The lower quarterly average PMI readings were reflected in third-quarter GDP growth figures that came in at 7.4% versus consensus forecasts of a 7.5% rise. In our view, the recovery will be modest and bumpy. We expect China’s full-year GDP growth to recover to between 7.8% and 8.1% in 2013 – up slightly from our estimate of 7.6% for 2012.
Beijing’s easing policy so far has increased investment and reduced the risks of a hard landing for the Chinese economy.
The recent reiteration of many economic plans by central and local government – with a focus on infrastructure investment – has gradually flowed through to fixed-asset investment (FAI) data. With total new planned projects up by a third in August, we are waiting to see if those projects will translate into rising FAI in the months ahead.
A fading drag from net exports, resilient private consumption and a pick-up in investment from both infrastructure and residential housing could drive recovery from early next year. A recent pick-up in land purchasing by property developers is another indicator of a nascent recovery in this economically important industry.
2013 prospects
There are different implications for assets in a scenario of a modest recovery in growth starting later this year or early 2013.
Some higher-yielding corporate bonds in the industrials and property sectors remain attractive given the continuing improvement in credit conditions and investors’ search for yield. However, investors should retain a degree of caution, given that credit spreads are only just above record lows and a sharp recovery in growth looks unlikely.
The MSCI China Index has rallied 8% since its September low and has outperformed its Asian stock market peers. This rally has primarily been driven by rising risk appetite following the strong policy action taken by the US Federal Reserve and the European Central Bank. But we would need to see improved economic growth over the next two quarters for this outperformance to continue.
Many investors appear to have high expectations of policy stimulus before the Party Congress in November, although Chinese equities could underperform if Beijing continues with its reactive, rather than proactive, policy stance.
