We received further confirmation overnight from China that the stimulus package is having an impact. Industrial output increased at a rate of just 3.8% in the first two months on 2009; following December’s 5.9% and November’s 5.4% clip. February rose 11% on its own however, a figure heavily skewed by the placement of Lunar New Year (which increased the number of working days), but the data still suggests that the pace is picking up for heavy industry. Major signals of this increase in activity included a 39.13% Y/Y increase in cement production and a 22.9% increase in automobile output.

The increase in cement manufacturing is directly correlated to the larger than expected growth in fixed asset investments which we discussed yesterday in depth. As the government has increased its infrastructure projects the impact on heavy industry is being felt rapidly -for example the announced tripling of railroad investment spending which helped drive an increase in steel production during February.

The pickup in automotive production is evidence that consumer demand has not completely disappeared. Sales of domestically made vehicles rose 25% in February according to the China Association of Automotive Manufacturers following the reduction in the sales tax on small cars, part of November stimulus program. Further government action -such as a program to subsidize vehicle purchases by farmers, are expected to take effect this month. The fact that a government incentive got Chinese consumers making major purchases is a massively positive data point for the automotive industry as it continues to consolidate an expand.

Clearly the combined YTD output data, the lowest growth rate in 5 years, is an unwelcome reminder of how bad the external demand picture is for China’s critical export industries. We continue to be bullish however, and view the positive data points emerging from the heavy industrial sectors as a signal that the stimulus plan is working and that the pace of growth will return to higher levels in the coming months. It’s a hard road ahead, but the Ox has the brute strength to get the job done.


The National Bureau of Statistics released data showing that growth in retail sales contracted in January and February, increasing 15.2%, compared to a 20.2% increase in the same period last year, signaling a continuing trend of slowing demand. This is the third straight decline, following December’s 17.4% growth and 22% in October. Consumption was 2 trillion Yuan ($290billion) during the first two months of 2009. Retail sales for 2008 were up 21.6% when Chinese GDP growth was approximately 9%, slipping into single-digit growth for the first time in six years. Retail sales in urban areas increased by 14.1%, Y/Y, while sales in rural areas increased 17%.

This data, while underscoring the fragility of the developing Chinese consumer base, is still better than bad on the margin. We are taking a somewhat contrarian view in arguing that still-double-digit growth levels in consumer spending, combined with the signal sent by automotive sales, suggest that consumers can still be coaxed back into the market. Obviously, with deflationary pressure and rising unemployment, retailers are not even close to being out of the woods yet -we will be following the situation closely.


Official credit data released last night confirmed the estimates we referenced in yesterday’s post. The People’s Bank of China reported that banks extended 1.07 trillion Yuan in new loans in February, as state companies and government agencies borrowed to finance stimulus projects - a 30% Y/Y increase. This follows January when a record 1.62 trillion Yuan of new loans were extended to finance the increase in investment, increasing total outstanding Yuan denominated loans to 33 trillion Yuan by the end of February, 24.2% higher than the previous year, as M2 reached 50.7 trillion Yuan. At the same time, Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC) requested that lenders increase their provisions to 150% of their non-performing loans, up from 130%, as a precaution over solvency risks -suggesting that the reality of defaults in the face of massive export contraction is being prepared for proactively, a positive signal.

The Ministry of Commerce has announced that going forward; provincial commerce officials will have the power to authorize the establishment of foreign owned ventures and inflows of foreign direct investment (FDI). These officials will also have the power to approve foreign acquisitions up to $100 million, although foreign strategic investments in listed Chinese companies will still require approval by the central government. This move is in direct response to the four straight months of contraction in FDI, which fell 32.6% in January, Y/Y, as capital flows essentially dried-up globally.

The active encouragement of increased foreign investment, coupled with decentralization that could expedite the process significantly strikes us as a very positive development which, when coupled with the expansion of credit and proactive risk management measures adopted by Beijing show the government’s firm commitment to meeting growth targets.

We have been bullish on China consistently since December of 2009 and remain so – we are long China via the CAF closed end fund.

Andrew Barber

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