China no longer tops list of global economic concerns

November 19, 2012

There are still plenty of macro factors to worry about around the world, but China seems to have dropped down the charts. Conversations with delegates at TradeTech Asia, the annual trading heads’ conference held in Singapore, revealed that the U.S. fiscal cliff, food inflation, geopolitical risks in the Middle-East and Europe all trumped China as the major risks out there for financial markets.

Last time this year China was public enemy #1 for investors. But according to the latest Bank of America Merrill Lynch Global fund managers’ survey confidence in the outlook for China’s economy has surged to a three-year high – a big turnaround from a year ago when the fear was that shrinking company profits, rising bad loans and weak global demand at a time of stubbornly high inflation would all add up to a “hard-landing” for the world’s second largest economy. The consensus opinion among economists now is that the worst is over and growth bottomed in the third quarter that ended in September.

Money has come back to the market too. Nine straight weeks of inflows have seen $3.2 billion pumped into China equity funds, according to EPFR, in the lead up to the 18th Party Congress where China’s new leadership was unveiled.  Hong Kong, still the main gateway for foreign investors into China, has seen optimism over China combined with the U.S. Fed’s third round of asset purchases lead to strong capital flows into the market. The territory’s monetary authority was forced to repeatedly intervene to defend the HK$’s peg against the US$ last month while the Chinese yuan is hitting fresh record highs.

China’s new generation of top leaders, led by the conservative new party chief Xi Jinping, inherits an economy growing at its slowest annual pace in three years and will be tasked with, among other things, finding China’s next engine of growth. Not everyone is convinced that this will be an easy transition for the investment-led economy, and some fear investors are getting ahead of themselves.  John Woods, an Asia investment strategist at Citi Private Bank who has been doubtful much will change in China, has this to say:

Yes, there are some signs that China is stabilising; and yes, Chinese shares are cheaper than they were. But there are good reasons for this. First, profits have been shrinking and second, China’s macro environment is unlikely to provide a fillip to them anytime soon. The start, this week, of the handover of power to the next generation doesn’t, we think, presage any change in this calculus.

The question to ask then is whether the mood shift comes down to great PR in the run up to China’s leadership transition or whether the last two years were indeed a managed slowdown on the way to a more sustainable growth trajectory – the elusive soft landing.

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