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24-05-2014, 02:57 PM
China data emboldens bulls, bears
Vesna Poljak
776 words
24 May 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Shock Experts are unable to rule out a hard landing for the Chinese economy
Mixed signals out of China have created more confusion around the outlook for the world's second-biggest economy as economists wrestle with a spike in factory output and persistent fears around the property sector that could spark regional contagion.
For Australia, the risks of a hard landing are especially high given the reliance of the economy on China-bound exports. Credit agency Standard & Poor's has asserted that a quick downturn in the terms of trade is one of the three big external shocks Australia faces which could derail its fiscal position.
HSBC's closely-watched flash purchasing managers index for manufacturers came in at a five-month high on Thursday, unleashing a fresh wave of optimism and pushing up the Australian dollar.
It was a volatile week for the currency, having sunk below US93¢ when the iron ore price fell below $US100 a tonne for the first time this year. The Australian dollar was fetching US92.37¢ on Friday but speculative positioning indicates traders still think it will rise further in the short-term.
There is seemingly no avoiding China property bears.
On May 21, Moody's downgraded its view of China's property sector to a negative outlook from stable. The credit ratings agency blamed expectations for a "significant" slowdown in residential property sales growth, high inventory levels and weaker liquidity.
China's residential property sector accounts for roughly one-quarter of steel consumption, the material derived from iron ore.Barclays warning
And Barclays warned earlier this month that the risks of a "disorderly adjustment" within the Chinese housing sector are rising and the downturn as it is will continue through next year. Since then, policymakers have come up with a plan to make mortgages cheaper and quicker to process for borrowers.
UBS Global Asset Management head of investment strategy, Tracey McNaughton, said the risks of a hard landing could not be discounted but she does not see a collapse coming.
"Our view is that China is not going to experience a hard landing. The fear of a hard landing is certainly understandable given China is going through momentous change and also particularly given no other economy in the world has gone through the kinds of changes China is going through without some missteps along the way."
But there was good reason to accept China's progress at face value too.
"For now the authorities still maintain a high degree of control over the economy and that provides some comfort that will ensure a stable ride. They're slowly injecting market forces into the economy and they're not letting go just yet, if something goes wrong," Ms McNaughton said. She doesn't advocate Australian equities chiefly because they look expensive.
State Street head of portfolio management for its Asia Pacific investment solutions group, Mark Wills, thinks China's transitionary plan has already started, as is the pain that comes with it.Two risks
He rates the chance of what the market would view as a China hard landing as being "a pretty good probability" and to that effect, says the two biggest risks for the typical Australian investor with a balanced portfolio are the Australian dollar and BHP Billiton.
Mr Wills pointed to the blueprint set out for China in the third plenum last year and its emphasis on addressing pollution, housing market deregulation and interest rate liberalisation.
Pollution represents an enormous priority for the Communist Party because Chinese are signalling their resistance to dirty air.
"Basically their economy is built on coal usage. The reason why you've had so much of this pollution is it's kind of a metaphor for the misallocation of resources that's occurred in China over the last couple of decades," he said.
This will be resolved by shutting inefficient old plants, coinciding with the plenum's urging of state owned enterprises to be independently profitable.
Evidence of this happening can be found in the slowing trend revealed in the PMI data. The clean-up is occurring in the sprawling trust products market too. "They've been signalling to investors they want them to bear pain, they will let one of these trust products go broke," but the People's Bank of China would equally be wanting to avoid contagion at all costs, Mr Wills said.
"If you're investing hoping that China's going to be the engine of global growth that it has been, we're pretty much in the camp that you're going to be disappointed."
Fairfax Media Management Pty Limited
Document AFNR000020140523ea5o00023
Vesna Poljak
776 words
24 May 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Shock Experts are unable to rule out a hard landing for the Chinese economy
Mixed signals out of China have created more confusion around the outlook for the world's second-biggest economy as economists wrestle with a spike in factory output and persistent fears around the property sector that could spark regional contagion.
For Australia, the risks of a hard landing are especially high given the reliance of the economy on China-bound exports. Credit agency Standard & Poor's has asserted that a quick downturn in the terms of trade is one of the three big external shocks Australia faces which could derail its fiscal position.
HSBC's closely-watched flash purchasing managers index for manufacturers came in at a five-month high on Thursday, unleashing a fresh wave of optimism and pushing up the Australian dollar.
It was a volatile week for the currency, having sunk below US93¢ when the iron ore price fell below $US100 a tonne for the first time this year. The Australian dollar was fetching US92.37¢ on Friday but speculative positioning indicates traders still think it will rise further in the short-term.
There is seemingly no avoiding China property bears.
On May 21, Moody's downgraded its view of China's property sector to a negative outlook from stable. The credit ratings agency blamed expectations for a "significant" slowdown in residential property sales growth, high inventory levels and weaker liquidity.
China's residential property sector accounts for roughly one-quarter of steel consumption, the material derived from iron ore.Barclays warning
And Barclays warned earlier this month that the risks of a "disorderly adjustment" within the Chinese housing sector are rising and the downturn as it is will continue through next year. Since then, policymakers have come up with a plan to make mortgages cheaper and quicker to process for borrowers.
UBS Global Asset Management head of investment strategy, Tracey McNaughton, said the risks of a hard landing could not be discounted but she does not see a collapse coming.
"Our view is that China is not going to experience a hard landing. The fear of a hard landing is certainly understandable given China is going through momentous change and also particularly given no other economy in the world has gone through the kinds of changes China is going through without some missteps along the way."
But there was good reason to accept China's progress at face value too.
"For now the authorities still maintain a high degree of control over the economy and that provides some comfort that will ensure a stable ride. They're slowly injecting market forces into the economy and they're not letting go just yet, if something goes wrong," Ms McNaughton said. She doesn't advocate Australian equities chiefly because they look expensive.
State Street head of portfolio management for its Asia Pacific investment solutions group, Mark Wills, thinks China's transitionary plan has already started, as is the pain that comes with it.Two risks
He rates the chance of what the market would view as a China hard landing as being "a pretty good probability" and to that effect, says the two biggest risks for the typical Australian investor with a balanced portfolio are the Australian dollar and BHP Billiton.
Mr Wills pointed to the blueprint set out for China in the third plenum last year and its emphasis on addressing pollution, housing market deregulation and interest rate liberalisation.
Pollution represents an enormous priority for the Communist Party because Chinese are signalling their resistance to dirty air.
"Basically their economy is built on coal usage. The reason why you've had so much of this pollution is it's kind of a metaphor for the misallocation of resources that's occurred in China over the last couple of decades," he said.
This will be resolved by shutting inefficient old plants, coinciding with the plenum's urging of state owned enterprises to be independently profitable.
Evidence of this happening can be found in the slowing trend revealed in the PMI data. The clean-up is occurring in the sprawling trust products market too. "They've been signalling to investors they want them to bear pain, they will let one of these trust products go broke," but the People's Bank of China would equally be wanting to avoid contagion at all costs, Mr Wills said.
"If you're investing hoping that China's going to be the engine of global growth that it has been, we're pretty much in the camp that you're going to be disappointed."
Fairfax Media Management Pty Limited
Document AFNR000020140523ea5o00023