Last updated: 15:26 / Tuesday, 8 October 2013
Opnion column by Henderson GI

Are Beijing’s Policy Measures Having an Effect on the Real Economy?

Imagen
Are Beijing’s Policy Measures Having an Effect on the Real Economy?

Chinese equities have recently rallied and the market is beginning to outperform parts of Asia and other emerging markets. This has come at a time when investor sentiment and expectations are very low. Just as economists cut their gross domestic product (GDP) forecasts, the Chinese economy is starting to show signs of a recovery that appears to be gathering pace.

Investors who have avoided China for a while may be wise to reconsider their positioning

While China still has many structural issues to address, the Chinese authorities’ rhetoric and policy has turned more supportive of reform and growth and this is now feeding through to more robust economic activity. Since the new Communist party leaders took office in November last year, we have been encouraged by their reform agenda including putting pressure on weak financial institutions, curbing the powers of large state-owned monopolies and getting serious about economic reform. It is refreshing that the new Party leaders are content to endure short-term economic growth pain for long-term sustainability gain. However, it appears over the Summer that they have begun to stress growth over reform.

Within our portfolio, companies that have benefited from this more positive backdrop include BMW's joint venture partner Brilliance China

Encouragingly, the latest macroeconomic indicators suggest that these initiatives are having the desired effect. In analyzing China’s economic health, among the key data we closely monitor are purchasing managers' index (PMI) manufacturing surveys, commodities demand and power consumption. HSBC's flash China PMI for manufacturing rose from 50.1 to 51.2 in September, adding to signs of a rebound in its economy. Meanwhile, given an apparent pick-up in global economic activity and order outlooks, it’s not too surprising that China’s export growth edged up to 7.2% year-on-year, exceeding market expectations.

Recently, China’s power production increased to an all-time high as summer temperatures soared. According to data compiled by Bloomberg, electricity generation has climbed to its highest monthly figure on record. The official Xinhua News Agency estimates that China’s power use may rise by 5 to 6 percent in 2013. Already this year we have witnessed a strong pick up in China’s power generation growth – see chart.

Chart: A strong pick up in China’s power generation growth

The half-year corporate reporting season has also been reassuring. A notable number of companies have produced strong profit growth above expectations at a time when scepticism about China has been high. Within our portfolio, companies that have benefited from this more positive backdrop include BMW's joint venture partner Brilliance China, China’s leading SUV brand Great Wall Motor, and offshore oil service provider China Oilfield Services. We are increasingly positive on China. Many companies appear to offer good value and profit growth potential, while current valuations are cheap compared to historical price-to-earnings and price-to-book measures.

Tightness in interbank money market rates is among the risks that we are monitoring, although the likelihood of an imminent liquidity crisis appears to be minimal as the People’s Bank of China (PBoC) is unlikely to allow this to happen: one concern is that house prices are rising strongly again and the authorities may want to cool this trend. We also continue to look for any signs that the reform process is slowing. Overall, we expect the Chinese economy will experience moderate expansion this year - an ideal scenario for stock pickers like us. Investors who have avoided China for a while may be wise to reconsider their positioning.

Opinion column by Charles Awdry, investment manager of the Chinese Opportunities Fund at Henderson Global Investors

menu
menu