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Reports of China's Slump May Have Been Exaggerated

24 July 2014 in Trading Ideas

While 2014 has been slightly kinder to Chinese equities than 2013, concerns about the Asian country’s near-term growth prospects have continued to play a part in Shanghai’s stock exchange being able to gain any significant traction.

It was with a collective sigh of relief, then, from many investors in Chinese stocks when the nation revealed that second-quarter growth managed to expand a bit from the year’s first quarter – even though questions linger about how it was achieved.

As The Wall Street Journal reported, by instituting a program of expanding credit and accelerating government spending China arrested a deceleration in growth, economists said. Second-quarter growth increased slightly to 7.5% year over year, the National Bureau of Statistics reported Wednesday, compared with 7.4% in the first quarter.1


The extent of the effort to shore up growth was abundantly evident. Government spending—galvanized by eight inspection teams Beijing sent to the provinces to enforce orders to spend, the Journal said—rose 26% in June from a year earlier, according to the finance ministry. In addition, total social financing, a broader measure of credit in the economy, grew in June by 40% over May levels.

In line with that effort, value-added industrial output rose 9.2% year over year in June, accelerating from an 8.8% increase in May, while growth in fixed-asset investment in non-rural China ticked up to 17.3% year over year in the January-June period compared with 17.2% in the January-May period.

Retail sales growth held up, easing slightly in June to 12.4% year over year, compared with 12.5% in May.

The news has also seemed to contribute to a recent uptick in Chinese equities. The China segment (60.6% weighting) of the BRICs Building motif, for example has gained 8.7% over the past month.

The motif itself is up 6.5% in the past month. In that same time, the S&P 500 has gained 1.4%. For the year to date, the motif has increased 10.9%; the S&P 500 has risen 9.7%.

Many analysts also don’t see the second-quarter growth figures as a one-off. Earlier this week, HSBC raised its 2014 estimate on China’s GDP to 7.5% from 7.4%, following strong June data , which included overall fixed-asset investment growth of 17.9%.2

While acknowledging the recovery has largely been driven by government policies, HSBC analysts said its own forecasts could be exceeded if more easing comes over the next few months.

As the Journal pointed out, a chief concern among some economists is that the stimulus risks achieving a buildup of debt.

A credit binge in 2009 saw debt soar among local governments and state-owned companies, while crowding out more efficient entrepreneurs, the Journal said. Local government debt rose 20% annually from 2010 to 2013, according to the World Bank, while China’s corporate-debt-to-GDP ratio at around 125% is among the highest in Asia.

This time around, Chinese leaders have said they welcome slightly lower growth, giving them breathing space to reduce the economy’s dependence on investment and to boost private enterprise and household consumption, the Journal said. Beijing has sought to target its spending more carefully, trying to steer money to public housing, alternative energy and rail projects that will benefit the public and boost efficiency.

Based on the recent performance of Chinese stocks, the second-quarter GDP results may have imbued investors with another dose of patience for the immediate term.

1Mark Magnier, “China GDP Grows 7.5% in Second Quarter,” wsj.com, July 16, 2014.

2Shuli Ren, “HSBC Ups China GDP to 7.5%, Sees Upside,” barrons.com, July 21, 2014.