Over in the Blue corner of our office, we have China bear, Greg Canavan…
And here in the Red corner, you have yours truly: China bull, Alex Cowie.
If you’re worried things may get out of control, don’t. We’re good mates really, we just have different views on where China’s economy is heading.
In fact I take my hat off to Greg. Because it is hard work defending an unpopular stance – particularly when the data is going against you.
Already this year, we’ve seen a surge in China’s growth rate from 7.4% to 7.9%.
Then last week we had another round of positive monthly numbers from China’s business sector, in the form of the ‘Purchasing Managers Indices’ (PMI).
Now I’ll admit: taking pot shots across the office is good fun.
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Now here’s the problem with the China bear argument (including Greg’s), Chinese economic growth is already recovering.
And with China’s economy firing up again, the resources sector is putting a woeful 18 months behind it and is turning around right now. It’s happening in slow motion, like an iron ore vessel changing course – but the trend of resource stocks is finally pointing up once more.
Chinese Growth Still Expanding
The latest fly in the ointment for the China bears was the latest round of Purchasing Managers Index data. This includes both the official reading, and HSBC’s reading.
These data give an up-to-data reading on the pulse of Chinese business. And both were in positive territory (above 50) again.
China’s Manufacturing Sector – Still Growing
So, what does this mean?
Well, here’s a recap: a reading of 50 suggests industry is stable, and therefore that economic growth is stable. Above 50, and China’s economic growth is accelerating. Below 50 suggests economic growth is decelerating. Easy, right?
Therefore the latest official reading of 50.1 means it was a positive reading, and therefore China’s economic growth is accelerating.
However, never in the history of statistics has the market misunderstood one indicator more.
Some were calling 50.1 a ‘bad reading’ – because it had dropped from 50.4 in January.
This simply isn’t true.
50.1 is still expansionary – it suggests China’s economy is still accelerating, just not at the same rate.
Now look again at the readings China put in last quarter: 50.2 in October, 50.6 in November, and then 50.6 in December. To put them in context, 55 would be a very strong result, and was what we used to see before the GFC.
Yet those readings of 50.2, 50.6, and then 50.6 were still enough to drive Chinese economic growth from 7.4%, to 7.9% last quarter.
My point here is that all we need is for the purchasing manager numbers to stay even just slightly above 50 this quarter, and we’re likely to see China’s growth creep above 7.9% at next count.
So China’s economy is well on track for this already. And don’t forget that China was closed for business for a week in February due to the Chinese New Year. Without this, the number would probably have been above 50.1.
An Inside View on China’s Economy
But to avoid getting too bogged down in individual data points (government data, no less) it’s wise to step back, and look at the big picture.
To this end, in a few weeks I’ll be writing to you from Hong Kong.
I know, I know. Hong Kong isn’t quite the same thing as China. But it will give me a better view than you get from a desk in St Kilda.
You’ll be getting scoops from me on most days, as I attend, and speak at, the ‘Hong Kong Mines and Money’ conference.
Unleashed for four days, I’ll listen to, and get to meet with, a bevy of Chinese bankers, fund managers, analysts and companies.
And to test the ‘official line’ against reality, I’ll also meet with my on-the-ground contacts over there, to get their two cents. It’s will be a busy week. I can’t wait to get over there.
You can always get a good feel for the industry just by assessing the mood in the room at events like this. And I expect the mood to be buoyant. There looks set to be a record attendance, which is a good start.
But the real reason for the excitement is that Chinese lending figures have taken off. Here’s a snippet of what I wrote last week to Diggers and Drillers readers about this:
‘This is lending at a pace never seen before in China. China means business. Even China’s stimulus package in the depths of the GFC looks modest by comparison. That four trillion Renminbi injection China announced back in November 2008 marked the turning point for the Australian resource sector, and preceded a rally that saw the Metals and Mining index double in just over two years.
‘So just contemplate that including the RMB2.5 trillion China lent out in January, China has now lent a total of RMB5.6 trillion over the last three months.
‘This flood of lending could go straight into infrastructure projects that could create massive demand for key commodities in both the months and years ahead. It reinforces my bullishness on the resource sector, and as resource stock prices are still just getting off their knees, this is a very exciting time to be looking at oversold resource juniors.
‘Of course, not all of this money will feed into infrastructure. It’s no coincidence that the Shanghai stock market has bounced 17.5% in the last three months. Chinese property prices are on the move too, with Beijing house prices up 5.4% over two months. The government is discussing property purchase restrictions to hold back these price hikes.
‘Some speculation is inevitable, however the majority of the capital should still feed into infrastructure spending. The reason I say this is that China Development Bank is the biggest conduit of lending into government approved projects, and it has seen a big jump in activity recently.
‘It has just announced recent loans totalling 1RMB billion on infrastructure projects.
‘These vary from coal-oil transport, water conservation, agriculture, forestry, telecommunications, power networks, public infrastructure, strategic technology, culture, environment, and energy-saving government-supported housing projects.
‘It is clear that CDB is driving this jump in loans. More are likely to follow, as the government uses CDB to finance further infrastructure projects.’
Make no mistake…
The colossal sum of lending in China is heading for major infrastructure projects – and it will have a big impact on commodity demand, and in turn, the resource sector.
After two long years of pain, the swing back up from oversold levels will make resource stocks a rewarding place to be in 2013.
Dr Alex Cowie
Editor, Diggers & Drillers
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