Nomura's outlook of a 1Q09 recovery, the most bullish to-date, is drawing widespread excitment.

CHINA’S ECONOMIC upturn is happening this very quarter, according to Nomura International (HK) in a report published this week.

China’s GDP growth has declined for six consecutive quarters, from 13.8% y-o-y in Q208 to only 6.8% in Q408 but economic indicators and policy responses tracked by Nomura are suggesting a V-shaped rebound in 1Q09.

Nomura and other research houses are positive as Jan growth in China’s bank loans, retail sales and purchasing manager’s index are all looking up.

Loan growth in Jan 2009 was up a hefty 55% month-on-month, amounting to a historic record of Rmb 1.2 trillion for boosting economic activity last month.

Speedy government action reversing economic austerity policy from a year before is appearing to be effective.
Stock indices in China have rallied ahead of strong economic data but S-chips are laggards.

In Nov 2008, the People’s Bank of China removed loan quotas. (Note: this refers to China’s monetary authority, and is not to be confused with Bank of China, a state-owned leading commercial bank.)

Benchmark interest rates were also reduced (by some 2% from Sep-Dec 2008) as well as reserve requirement ratios.

In Dec 2008, Rmb 100 bn of China’s Rmb 4.0 trillion stimulus package was made available to designated industrial and social projects.

This is intended to increase spending momentum to total expenditure of Rmb 400 billion by local governments and state-owned enterprises.

To ensure speedy action,
* A deadline for use of funds by 31 Mar 2009 was imposed;

* Funds usage was restricted to new investment, and was not be used to repay bank loans

With effect from 1 Jan 2009, value added tax of 17% on machinery and equipment was removed.

Loan growth in China grew 55% month-on-month to Rmb 1.2 trillion in Jan 09.

PMI rising

Meanwhile, retail sales remained strong, growing 13.8% yoy for 2009’s seven-day Chinese New Year holiday.

Another sign that recovery is at hand is the increase in China’s Purchasing Manager’s Index, which measures five major indicators in the manufacturing industry: new orders, inventory levels, production, supplier deliveries and employment.

China’s PMI rose for the second straight month in Jan to 45.3% from 41.2% in Dec, according to China Federation of Logistics and Purchasing. A reading above 50 shows manufacturing growth activity while below 50 shows a contraction.

Sebastian Chong

Economists believe that China's PMI may have bottomed last Nov, when it fell to 38.8%.

Nonetheless, one should still be wary when picking S-chips, with special attention on debt levels, says Sebastian Chong, a retired accounting professor who founded investment website

His personal favorites include Epure, Oceanus, Sino-Environment, Synear, Celestial Nutrifoods, Midas, Raffles Education and Yanlord.

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