From my friend David Kotok
China Update, Part 2
January 13, 2012
This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist. He joined Cumberland after years of experience at the OECD in Paris. His bio is found on Cumberland’s home page, www.cumber.com. He can be reached at Bill.Witherell@cumber.com.
Developments in China have our attention as 2012 gets underway. David Kotok, in “China Update, Part 1,” wrote about some disturbing indications that China is tightening restrictions on the freedom of speech. Last month I wrote in “Reassessing China Equities” about more positive indications in the economic policy sphere that suggested the slowdown in the Chinese economy will be moderate and brief and that Chinese stocks will likely regain their relative strength in the coming months, following their significant underperformance in 2011.
More recent data is confirming the redirection of policies towards stimulating the growth of the Chinese economy. The supply of loans from commercial banks in December, some Rmb640.50 billion, was considerably above the volume for November, Rmb562.2 billion. The 13.6% growth in the M2 measure of the money supply in December was up from 12.7% in November. Also, fiscal spending is speeding up.
An upside surprise in the December Purchasing Managers Index (PMI) and better-than-expected export growth are leading to a scaling up of estimated GDP growth for the year 2011. We now expect the growth for 2011 to be reported as 9.2%. We are projecting 2012 growth at 8.8%, followed by a return to 9+% growth in 2013. The Chinese currency is likely to continue to strengthen at a controlled moderate pace of around 3% per annum.
Looking out further, to a not very distant future, the December 31 issue of the Economist reports on its analysis that by 2018 China’s GDP in US dollar terms, converted at market prices, will exceed that of the United States. Last year, only seven years earlier, US GDP was approximately twice that of China’s. Our own long-term economic scenario similarly projects 2019 as the year that China’s GDP eclipses that of the United States.
Already China leads the world in manufacturing and in purchases of cars. By 2019 China will have also become the world’s largest market for consumer and industrial products. On a per-capita basis the average American will still be much better off than the average Chinese in 2019. Nevertheless, China’s role in the global economy, already great, will become even more predominant. Japan revealed it understands this when last month it announced jointly with China an agreement for Japan to buy Chinese sovereign debt, despite the difficult past of these two countries. While China’s capital market will still be 30% smaller than that of the US, it is expected to increase at more than twice the rate of the US market. The importance of such projections for international investors is evident.
We have written about the growing number of US-listed China ETFs, 19 equity ETFs at last count. There is now over $8 billion in China ETF assets, with a daily trading volume of over $900 million. Chinese equities, as measured by the broad-based SPDR S&P China ETF, GXC, that we prefer for our portfolios, slumped by 8.4% over the December 1-19 period; but they have since trended upward, surpassing their December high by January 12. As we anticipated, China has returned to outperforming the emerging markets benchmark. Over the past thirty days (through January 11), GXC has gained 1.7%, whereas the iShares MSCI Emerging Markets ETF is up only 0.3%. We have recently added to our China positions in our International, Emerging Market, and Global Multi-Asset Class portfolios.
Bill Witherell, Chief Global Economist
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