- We continue to receive confirming evidence of a cyclical recovery in the Chinese economy. This directional strength out of the world’s second-largest economy and core contributor to global GROWTH should continue to underpin our 1Q Macro Theme of #GrowthStabilizing.
- On the strength of this proactively predictable pickup in Chinese economic activity and the Chinese Communist Party’s purported POLICY agenda, we continue to hold a bullish bias on Chinese consumer stocks and select international consumer names with a strong Chinese footprint with respect to the intermediate-term TREND and long-term TAIL.
- Additionally, both Hong Kong and Singapore (our other two long ideas in Asia on the equity front) should continue to benefit from a rebound in Chinese demand – albeit rather muted relative to China’s glory days – with respect to the intermediate-term TREND.
Both the data and the tape(s) continue to support our 1Q Macro Theme of global #GrowthStabilizing. Moreover, the fundamental RESEARCH signals continue to affirm what our quantitative RISK MANAGEMENT signals have been suggesting since early-DEC.
ANALYSIS OF KEY DATA AND TRENDS
With regards to China specifically, we received a heaping helping of the country’s 4Q, DEC and JAN GROWTH data overnight; on balance, it was broadly positive – which was in-line with our expectations of continued directional improvement throughout the Chinese economy:
- SURVEY DATA
- JAN MNI Flash Manufacturing PMI: 54.9 from 52.2
- New Orders: 54. 6
- Production: 53.1
- 4Q Business Climate Index: 124.4 from 122.8; first sequential uptick since 2Q11
- 4Q Entrepreneur Confidence Index: 120.4 from 116.5; first sequential uptick in three quarters
- HEADLINE GROWTH DATA
- 4Q Real GDP: +7.9% YoY from +7.4% vs. a Bloomberg consensus estimate of +7.8%
- QoQ: +2% from +2.1%
- 2012 Real GDP: +7.8% YoY from +9.3%
- HIGH-FREQUENCY GROWTH DATA
- DEC Industrial Production: +10.3% YoY from +10.1% vs. a Bloomberg consensus estimate of +10.2%
- 2012 Industrial Production: +10% YoY from +13.9%
- Steel Products: +14.5% YoY from +15.9%
- Cement: +3.8% YoY from +6.9%
- Processing of Crude Oil: flat at +9.9%
- Electricity Production: +7.2% YoY from +8%
- DEC Retail Sales: +15.2% YoY from +14.9% vs. a Bloomberg consensus estimate of +15.1%
- 2012 Retail Sales: +14.3% YoY from +17.1%
- YTD-DEC Urban Fixed Assets Investment: +20.6% YoY from +20.7% vs. a Bloomberg consensus estimate of +20.7%
- 2012 Urban Fixed Assets Investment: +20.6% YoY from +23.8% in 2011
- DEC Electricity Output: +7.6% YoY from +7.9%
- 2012 Electricity Output: +4.6% YoY from +12% in 2011
- PROPERTY MARKET DATA
- DEC New Residential Property Prices:
- MoM Gainers: 54 cities from 53 cities; 54 cities is the largest number of cities posting sequential gains since APR ‘11
- YoY Gainers: 40 cities from 25 cities
- YTD-DEC Housing Starts: -6.7% YoY from -7.2%
- YTD-DEC Floor Space of Buildings Under Construction: +12.9% YoY from +13.3%
- YTD-DEC Floor Space of Completed Buildings: +11.4% YoY from +14.1%
- YTD-DEC Land Areas Purchased: -13% YoY from -14.8%
- YTD-DEC Total Sales of Buildings: +9% YoY from +9.1%
- YTD-DEC Floor Space of Buildings Sold: +1.2% YoY from +2.4%
- YTD-DEC Total Funds Earmarked for Real Estate Development: +16% YoY from +14.1%
- DEC Real Estate Climate Index: -3.3% YoY from -4.2%
To put this generally positive into context, we parse out some of China’s previously reported DEC economic data below:
- SURVEY DATA
- DEC NFLP Manufacturing PMI: flat at 50.6
- Input Prices: 53.3 from 50.1
- New Orders: flat at 51.2
- New Export Orders: 50 from 50.2
- Employment: 49 from 48.7
- Output: 52 from 52.5
- Backlogs of Orders: 45.9 from 45.3
- Imports: 49 from 48.5
- Inventories: 49.4 from 48.8
- Inventories of Raw Materials: 47.3 from 47.9
- Purchasing of Inputs: 52.1 from 51.4; highest since APR '12
- Suppliers’ Delivery Times: 48.8 from 49.9
- DEC Non-Manufacturing PMI: 56.1 from 55.6; a four-month high
- Construction PMI: 61.9 from 61.3
- HIGH-FREQUENCY GROWTH DATA
- DEC New Yuan Loans: +454.3B MoM from +522.9B
- DEC M2 Money Supply: +13.8% YoY from +13.9%
- DEC Aggregate Yuan Financing: +1.63T MoM from +1.14T prior and +1.27T in DEC ‘11
- New yuan loans totaled 8.2T yuan in 2012, accounting for 52% of the 15.8T yuan of cumulative aggregate financing in 2012 (which was up +2.96T from 2011; or up +23% on a YoY basis from down -8.5% in ‘11). This is the lowest ratio of bank loans to total social financing since the PBOC started compiling the figures in 2002, when bank loans had a 91.9% share.
- The +534% annual increase in Trust Loans to 1.28T in 2012 is quite a bit worrisome in that it could potentially be plastering over current delinquencies or foreshadowing future asset-liability mismatches among China’s lowest-quality borrowers, but that risk is neither here nor there for now.
- DEC International Capital Flows: +2% YoY from +1%
- It should be noted that Guo Shuqing, Chairman of the China Securities Regulatory Commission (CSRC), recently confirmed that China is thinking of expanding RMB qualified foreign institutional investment (RQFII) and QFII quotas in the future.
- Currently, the schemes only account for around 1.5% to 1.6% of the A-share market in China, and Shuqing hopes that this size will expand ~10x in the future.
- DEC Foreign Direct Investment: -4.5% YoY from -5.4%
- For the full year, inflows fell -3.7% to $111.7B from a +9.7% increase in 2011, while China's non-financial investment abroad increased +28.7% to $77.2B.
- DEC Exports: +14.1% YoY from +2.9% prior vs. +5% Bloomberg consensus
- DEC Imports: +6% YoY from flat prior vs. +3.5% Bloomberg consensus
- DEC Trade Balance: $31.6B from $19.6B
- INFLATION DATA
- DEC CPI: +2.5% YoY from +2%
- Food: +4.2% YoY from +3% (vegetable prices up +14.8% YoY in DEC on the strength of China’s coldest winter in nearly three decades)
- Non-Food: +1.7% YoY from +1.6%
- DEC PPI: -1.9% YoY from -2.2%
- Manufacturing: -2.5% YoY from -2.9%
Again, when all of the numbers are appropriately crunched, it’s plain to see that the Chinese economy is an acceleration phase with respect to both its GROWTH and INFLATION figures – something we have been calling for as early as the first of NOV.
THE KEY TAKEAWAYS
It’s long been our view that Chinese GROWTH will not accelerate demonstrably to the upside over the intermediate-term TREND or long-term TAIL.
Moreover, our primary investment thesis regarding the Chinese economy centers precisely around taking advantage of the deliberate economic restructuring implied by our fundamental conclusion: LONG the Chinese consumer and SHORT the global mining CapEx bubble (not from every price, of course).
To the extent you’re not yet familiar with this thesis, please review the following two notes and/or send us an email to set up a call.
- CHINA CRAWLS FORWARD, WHICH IS BETTER THAN CRAWLING BACKWARDS (12/10)
- KEY CALLOUTS FROM CHINA’S CENTRAL ECONOMIC WORKS CONFERENCE: EXPECT MORE OF THE SAME (12/17)
As a point of keeping score, Chinese consumer stocks (MSCI China Consumer Discretionary Index) is the second-best performing sector on the MSCI China index since 12/10 (#1 is Financials on cyclical NIM expansion) and is outperforming the MSCI China index by ~250bps.
With the Shanghai Composite Index continuing to track in a Bullish Formation on our quantitative factoring, our view continues to be insulated by market beta.
Also, our proprietary G/I/P outlook continues to auger well for continued strength in the CNY, which is just shy of 19YR highs. This is backed by continued pledges of “prudent” monetary POLICY out of the PBOC in the face of a subdued 2013 INFLATION target (+3.5%). Strong yuan = Strong Chinese consumer.
UPSIDE AND DOWNSIDE RISKS
From our purview, the next major catalyst to come down the pike on the POLICY front is the 12th National Party Congress, which convenes in MAR. There, members of the new seven-man Politburo will assume their formal roles as leaders of the Chinese state and formally outline their strategies to promote domestic demand.
We’re hoping for meaningful improvement on the social security front and perhaps some degree of early hukou reform(s) that may help advance China up the urbanization curve, but we’d settle for a continued focus on tax incentives and subsidies for now. Rome wasn’t built in a day.
Also, while perhaps not necessarily a catalyst, a rather important callout is the somewhat-shaky stabilization of China’s property market (~13% of GDP and ~25% of GFCF). Furthermore, to the extent recent price trends continue unabated throughout 1H, we could see the China’s Ministry of Housing and Urban-Rural Development (MOHURD) implement further tightening measures atop the existing ones they recently pledged to “unswervingly enforce” in order to “strictly curb speculation”.
Expanding the existing trial property taxes to a nationwide level would be one avenue they could pursue, but the latest official leanings on such a maneuver appear a bit on the dovish side. In fact, Premier Wen Jiabao recently signaled a delay in implementation amid further central government studies.
For now, China’s property market, and, by extension, it’s property developers have ample political headroom continue higher – at least over the next few months.
In conclusion, we continue to receive confirming evidence of a cyclical recovery in the Chinese economy. This directional strength out of the world’s second-largest economy and core contributor to global GROWTH should continue to underpin our 1Q Macro Theme of #GrowthStabilizing.
On the strength of this proactively predictable pickup in Chinese economic activity and the Chinese Communist Party’s purported POLICY agenda, we continue to hold a bullish bias on Chinese consumer stocks and select international consumer names with a strong Chinese footprint with respect to the intermediate-term TREND and long-term TAIL.
Additionally, both Hong Kong and Singapore (our other two long ideas in Asia on the equity front) should continue to benefit from a rebound in Chinese demand – albeit rather muted relative to China’s glory days – with respect to the intermediate-term TREND.