So, the many meetings of the leaders of China have came to an end and the Shanghai stock market celebrated by falling 2.6% yesterday. There are a few things wroth noting from the past two days.
As mentioned early on, Wen Jiabao has made it clear that GDP growth target for the year would be 7.5% instead of 8%. And just to recap, the inflation target is 4% yoy, and the M2 target is 14% yoy. Curiously, even though we have long known that the growth target will be lowered, the market did not like this. Bear in mind that 7.5%, if achieved, would be a very decent growth.
There is a possibility that China is already growing less than 8%. J.P. Morgan certainly is declaring that a hard landing has already begun, via Bloomberg:
“If you look at the Chinese data, you should stop debating about a hard landing,” Mowat, who is based in Hong Kong, said at a conference in Singapore yesterday. “China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate anymore, it’s a fact.”
Contrast that with Jing Ulrich, also from JPMorgan, proclaimed earlier this month, also via Bloomberg:
The “worst is behind us” for China’s real-estate market and property prices and transaction volumes will begin to improve in the second half of the year, Ulrich said. Still, high inventories in steel, cement and other materials will continue to put pressure on construction stocks, she said.
I believe that there is a good possibility that China will undershoot the inflation and money supply growth target as the economy continues to slow. I also hold the view that cutting RRR is not real easing, and the probability of significant interest rate cuts on both lending and deposit sides is small for the moment (though I hold the view that the lending rate might be cut more than deposit rate if rate cuts do happen).
Yesterday, Wen Jiabao said the real estate market regulations will have to be continued because real estate prices are still far from reasonable. That more than anything spooked the markets. Why, I don’t know. It is well known that real estate prices are ridiculous, and the government is determined to ring them to heal.
Meanwhile, there are a few more signs that policy tightness is hurting. Hang Lung Properties (101.HK), the operator of various commercial properties (notably shopping malls), said in its annual weakening retail sales. I believe that is consistent with the overall slowdown, and the disappointingly slow growth in retail overall:
In Shanghai we detected a weakening of retail sales. As a result, growth in rent, while continuing, has slowed. Office rental has improved somewhat. Margins remain high and again we are basically fully occupied. The mall in Plaza 66 has seen several major tenants expanding their shops, so some space is temporarily taken out of the market.
This is consistent with some of the observations made by the team of analysts at J.P.Morgan mentioned above:
Softer sales in October: Most of the retailers that we visited during the tour recorded different degree of sales growth slowdown in Oct compared to the first nine months, attributing this to 1) increasing macro headwinds, 2) warmer weather, as well as 3) higher base last year during the World Expo. Nevertheless, most retailers seemed reluctant to call it a “slowdown trend” and anticipated potentially strong year-end sales, given the much earlier Chinese New Year (end of Jan 2012). In addition, most retailers were comfortable with current inventory levels and suggested no urgency for heavy discounts. Separately, no retailers have encountered funding issues due to the credit tightening.
A slowdown trend forming? Softer sales in Shanghai seem to us to be early signs of a slowdown and suggest moderating growth of consumer discretionary sector in the near term, especially toward 1H 2012E when the sector has a tough base to beat. We have built in a new lower earnings base for 2012, reflecting SSSG slowdown and margin contraction. We currently look for 15% y/y sales increase and c.13% y/y earnings increase for 2012 (ex-sportswear), which are still on average 3% and 7% below the consensus respectively. Therefore we expect more consensus downward revisions.
Another sign of ongoing stress was the news yesterday that Bank of Communication is raising RM 56.6 billion in both A and H shares. Ministry of Finance, National Council for Social Security Fund, Shanghai Haiyan, Yunnan Hongta and HSBC will be among the subscribers. HSBC, for instance, will be paying HK$13.3 billion to buy 2.36 billion shares. As I’ve said before, I don’t like Chinese banks as the economy slows and the real estate bubble is popped. Assets on the banks’ books will be worth much less than they appear because of non-performing loans.
True, you can extend and pretend, but that doesn’t make banks stocks attractive. Investing in banks stocks with shrinking assets is like investing in out-of-the-money call options on bank assets. Everyone should expect that Chinese banks will have to raise more capital in the years to come.