The tightening of China’s monetary policy and the slowdown of economic growth has been a key issue in the past 12 months yet fund managers are divided, remaining optimistic or wary of the country’s prospects in 2012.
HSBC has long held the view that the Chinese economy will have a soft landing and believe this to be increasingly likely.
HSBC Asian economics research co-head Qu Hongbin said that with inflation and growth slowing, it’s now time to reflate.
“With inflation easing, growth will likely replace inflation as the main policy priority,” he said.
“Since peaking at 6.5 per cent year on year in July, inflation has cooled to 4.2 per cent, the slowest pace in 14 months.
“This trend should continue on the back of normalising credit expansion, moderating GDP growth, softening global commodities prices, and supply-side measures to stabilise food prices. Domestic demand is also slowing.”
The 50 basis point cut in the reserve ratio on 30 November will mark the beginning of the monetary easing cycle, according to Hongbin.
“The move will inject approximately RMB400 billion of liquidity into China’s banking system.
“We expect the People’s Bank of China (PBoC) to announce another 150 basis points of reserve ratio cuts in the first half of 2012 and a larger new loan quota.”
With selective measures already in place and further easing to be introduced, Hongbin said investment will remain the major growth driver going into 2012.
“Beijing can use public housing as a powerful buffer to offset the slowdown in private property,” he said, adding that it has already begun.
He said a new driver will be the strategic new industries, a key target in the 12th Five-year Plan, set to surge from 3 per cent of GDP in 2012 to 8 per cent of GDP in 2015.
Fidelity Chinese equities portfolio manager Anthony Bolton said the next 12 months will be a defining moment for Chinese investment once investors focus on relative growth rates they can get in different parts of the world.
“This will result in money flowing out of developed markets that have sovereign debt problems and very mediocre prospects over the next few years into the faster growing emerging markets like China,” he said.
“A slowdown in inflation has allowed the Chinese authorities to stop tightening monetary policy – this should be positive for the markets. The speed and format of further loosening will depend partially on how the domestic situation develops from here and whether the developed world returns to recession.”
Schroders chief executive Greg Cooper said there is a question mark over the veracity of the GDP data coming out of China and warns of the core argument for investing in China.
“Our macro [view] is that China’s a big economy and it’s likely to continue to have high growth rates. But high growth rates don’t necessarily translate into higher market performance,” he said.
“There’s this expectation that because you’ve got high GDP growth that it gives you high market performance but that’s not the case – they’re inversely correlated.
“Also, if you look at China’s performance it’s been horrible and one of the worst performing equity markets in the Asia-Pacific region, from an investment in Chinese equities point of view.”
Cooper said in terms of flow on effects for Australia, his concern is that a lot of the back growth story has already been embedded into prices.
“While China is likely to continue to grow over the medium to long term, you can’t necessarily translate that into market performance.”
