China Stimulus May Be 2 Trillion Yuan, Credit Suisse Says
Comment of the Day

May 29 2012

Commentary by David Fuller

China Stimulus May Be 2 Trillion Yuan, Credit Suisse Says

This is an interesting article from Bloomberg. Here is the opening:
The Chinese government's stimulus in response to the nation's economic slowdown will probably be as high as 2 trillion yuan ($315 billion), half the size of 2008's package, Credit Suisse Group AG said.

Spending on investment will range from 1 trillion yuan to 2 trillion yuan, compared with the 4 trillion yuan stimulus enacted in response to the global financial crisis, Tao Dong, a Hong Kong-based economist, said in a research note today. The government actions will aid a rebound in growth that may slow to 7 percent or "slightly below" this quarter, Tao said.

Premier Wen Jiabao has vowed to focus more on increasing growth after trade and domestic demand were below forecasts in April, data that prompted economists to pare outlooks for the world's second-largest economy. The government's efforts may help lift expansion in the second half to a range of 8 percent to 8.6 percent, Tao said.

"These policy stimuli can hold the slide in growth and investment demand, but probably not enough to stage a 2009-style rebound," Tao said. "The central government is likely to play a bigger role in funding, in contrast to last time in 2009 where the local governments relied on bank lending for funding almost entirely."

China's central bank is likely to cut lenders' reserve- requirement ratio by 50 basis points each in the third and fourth quarters, said Tao, who doesn't "rule out an extra cut in June."

There's a "possibility" China's central bank will lower the benchmark lending rate by a quarter percentage-point without a reduction in the deposit rate, he said.

David Fuller's view So many people are bearish of China, citing the underperformance of its stock market in recent years, political uncertainties given the 10-year leadership handover, the property bubble created by the 2008 stimulus package, provincial debts, concerns over the flexibility of its economic policy of command-capitalism, rising labour costs, and worries about its export markets as western economies continue to underperform.

Yet China probably still has the world's best performing economy, and it is also reflating. The bearish consensus, at least among western investors, suggests that they have sold positions in China, the rest of Asia and other growth economies, in favour of "safe havens" such as US Treasuries, equities and the dollar. The wisdom of that switch will most likely prove to be finite.

Fullermoney has long regarded monetary policy as by far the most important fundamental indicator for stock markets. Delegates at Eoin's recent chart seminars are likely to recall this chart which shows China's 10-Yr Bond Yield spread over the 2-Yr Yield. You can see it breaking up sharply in October 2008 as China commenced a massive reflation. You can see it breaking downwards sharply in January 2010 as China slammed on the breaks. You can see it moving sharply higher in October 2011 as China began to ease, and importantly, its latest gains indicate an additional monetary stimulus.

China's Shanghai A-Shares Index (weekly & daily) saw an upside key day reversal on Monday and good follow through today. It still needs to sustain a move above 2600 to generate more widespread investor interest but the last two-day's dynamics indicate that a second higher low is forming. Meanwhile, the A-Share PER is historically attractive and the Yield is at its highest level since the last two bullish trends for Chinese equities.

Here are some related articles from Bloomberg:

China's Stocks Climb To Two-Week High On Stimulus Speculation - The general view is that China will boost consumer sectors.

China Has No Plan For Large-Scale Stimulus, Xinhua Says - In other words, they will not repeat what with hindsight was the panicky stimulation of 2008 which led to a property bubble. Nevertheless, a significant stimulus is likely, including in this article: "focus on encouraging private investments in railways, infrastructure, energy, telecommunications, healthcare and education."

Fitch's Woo Says China Has 'Tremendous Scope' to Support Growth - It does, perhaps more so than any other country given central government reserves and an exceptionally high rate of personal savings.

Buy China Infrastructure Stocks, Jewelers On Weakness, HSBC Says - Consumer sectors still show the better overall relative strength.

China's Shanghai A-Shares have a lower correlation to Wall Street and Eurozone turmoil than most other stock markets. This is far less true for the Hong Kong Hang Seng Index (weekly & daily) (historic PER 9.13 & Yield 3.32%) and the Hong Kong China Enterprises (H-Shares) Index (weekly & daily) (8.25 & 2.69%), as you can see from these charts. Both indices fell sharply recently but also lost downside momentum in response to the global short-term oversold condition. Today's bounces suggest scope for additional technical rallies. Closes beneath this month's recent lows would be required to offset this scope.

As the second biggest economy and the world's main growth engine for over a decade, a recovery by China would have a dramatic knock-on effect, both regionally and for resources producers. Taiwan (weekly & daily) (21.93 & 4.51%) had a big upward dynamic today, near the 7000 region where we also saw an upside weekly key reversal which established last year's low in late December. A close beneath Monday's low would be required to offset further recovery scope.

ASEAN's 'little tigers' have historically been major beneficiaries of China's GDP growth, particularly the commodity exporters including Indonesia (weekly & daily) (19.94 & 2.47) Malaysia (weekly & daily) (15.16 & 3.68%), Philippines (weekly & daily) (17.15 & 2.80%) and Thailand (weekly & daily) (14.87 & 3.74%). These are not particularly cheap today but Indonesia, Malaysia and Thailand have steadied near their rising 200-day MAs. They need to hold these levels and this month's reaction lows to indicate that the recent corrective phase is over. The Philippines continues to show the best overall relative strength among this sector. Banking and financial centre Singapore (weekly & daily) (9.19 & 3.90%) has underperformed but has the best valuations. South Korea (weekly & daily) (21.78 & 1.42) recently accelerated to a low in the mid-region of last year's trough. Here also a close beneath the recent low would be required to offset current scope for some additional recovery. Vietnam (weekly & daily) (11.14 & 4.62%) had a torrid time last year due mainly to the government's step-by-step devaluation of the dong, followed by inflation. However, the currency has been stable against the USD since February 2011 and the stock market finally commenced a strong rally last January. This succumbed to the global correction in May and fell back to the now rising MA. If support can be found near this level Asia's highest-yielding stock market should remain a medium-term recovery candidate.

Normally, I would expect a stronger performance by Asian stock markets to firm the Asian Dollar Index (weekly & daily). However, this is not yet evident despite a return to last year's lows which should offer some support. Meanwhile, ADXY remains in a medium-term downtrend and an inability to bounce from current levels could imply a further delay before China's Shanghai A-Shares Index breaks above lateral trading near 2600 mentioned above.

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