China economy update – Positive signs of recovery?

By Heng Tong Jin,
DMG & Partner Securities


Besides the recent RMB4t stimulus package announced in Dec 2008 still on track, more recent measures from the government appear designed towards solving broader fundamental problems affecting the economy. This shows a shift in focus among Chinese policymakers in terms of their growth-boosting strategy. Two major policy steps are highlighted:

i) Plan to help nine industries
The authorities unveiled plans to help the auto, steel, shipbuilding, textiles, petrochemicals, nonferrous metals, machinery, light industry and IT industries with preferable taxation policies and easier access to credit. However, instead of announcing these plans as direct efforts to counter current dire economic conditions, the authorities have singled out that overcapacity and fragmentation as long-time major problems within these sectors. Hence going forward, the government has highlighted administrative efforts to encourage mergers and acquisitions (M&As) and spur technology innovation, which should generate some degree of industry consolidation, reduce price wars and irrational capacity expansion.

ii) Revamped healthcare system
Policymakers has also finalised a plan to revamp China's healthcare system, where the government would spend RMB850 billion over three years to ensure that 90% of Chinese citizens have basic coverage by 2011. This is a concrete step taken by the authorities to address the root cause of China's relatively weak consumer sector. The lack of a social safety net has long been the key reason for China's exceeding high savings rate, and hence relatively low spending rate.

Tentative signs of improvement
Loan growth, steel industry activity and the consumer sector are three areas that are showing signs of encouragement for a turnaround:

(a) Money and credit growth have begun to pick up, with M1 and M2 rebounding sharply in Dec 2008 and growing for a second month. This shows that loan demand remains healthy even though economic growth has come off substantially. More importantly, it shows that the Chinese banking sector has still a reasonable amount of liquidity and is not suffering the same fate of a Western log-jammed banking system.

(b) The steel industry continues to recover in terms of production and prices. From the times of the industry getting smacked by slumping demand, inventory overhang and diving prices, this revival in production and prices provide evidence that the government’s infrastructural spending projects are beginning to bear fruit. Resumption in steel production may also indicate that inventory de-stocking may have become overdone, and could set the base for a bottoming out in related industrial activities.

(c) Most impressively, the consumer sector has remained relatively robust with retail sales continuing to expand at close to a 20% annual rate. Although we expect this to soften going forward in the short to medium term in China, we believe consumer spending will surprise many to the upside with government measures to boost spending.

In a nutshell
These observations collectively do not prove that China’s economic slowdown has reached a bottom. It still remains entirely possible for more negative news to surface and future economic indicators to report even worse numbers. Nonetheless, this recent batch of data and government policies hopefully will help stabilise the Chinese economy over the long haul. For the Chinese steel sector, we have a NEUTRAL call on Delong with a target price of S$0.655, and for the consumer sector, we reckon China HongXing (S$0.19) will be a close beneficiary from resilient retail sales numbers.














Disclaimer
This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this report.

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