Following negative data last week, investors were clearly concerned
about global growth and anxiously anticipated government actions. While
Europe and the U.S. disappointed investors, China surprised on the
upside by cutting interest rates. The market reacted positively, as the
S&P 500 Index increased 3.7 percent.
It’s clear the government’s tone in China shifted this week with
the rate cuts. The government appeared to be comfortable with slower
growth, but that position seemed to change as the country took steps to
avert a hard landing and cut interest rates to stabilize the economy.
Over
the past decade, there were only two periods when the government
reduced rates: once in 2002, and several times at the end of 2008. This
time, rates were cut by 25 basis points each on lending and deposits.
The one-year benchmark deposit rate is now 3.25 percent and the 1-year
lending floor rate is now at 6.31 percent. Historically, easing rates
have been positive for the MSCI China Index.
As we often say at U.S. Global Investors, government policy is a
precursor to change. While there has been quite a bit of negative news
lately, government policy is making a significant step toward growth. We
believe now’s not the time to be bearish.
Analysts are only beginning to see signs of increased
infrastructure spending, which should help spur growth for the remainder
of the year. If you’ll remember in 2011, China deliberately tightened
its credit policy to stem inflation and slowed financing to local
governments, says J.P. Morgan. As a result, fixed asset investment
growth in infrastructure decelerated considerably, and railway
investment was completely halted, decreasing nearly 20 percent on a
year-over-year basis during the second half of 2011, says J.P. Morgan.
The decline in infrastructure and real estate investment on a
year-over-year percentage change is clearly seen in CLSA’s chart, and
it’s what Andy Rothman has attributed to slower growth in the world’s
second-largest economy:
Highway infrastructure spending “increased sharply” from January
through April, particularly in Western China, says J.P. Morgan. The
research firm says that the economic growth rates in the Central and
Western areas of the country “already outpace those of more developed
coastal provinces.” Fixed asset investment for infrastructure, energy
development and water projects in the Central and Western regions has
grown at a faster clip than in the Eastern region on a year-over-year
basis.
Rail infrastructure has also picked up. As of the end of 2011, the
Ministry of Railways received a credit line of more than $300 billion
from banks, and plans on issuing additional railway bonds, seeking
investments by pension funds and encouraging the private sector to
invest, says J.P. Morgan.
With fixed asset investment in the rail sector growing 34 percent
on a month-over-month basis, this government support is “starting to be
translated into action,” says Macquarie Commodities Research. If we see
spending in railways continue to increase, China will be able to meet
their full-year target, according to Macquarie.
China’s GDP during the second quarter is likely to be about 7.5
percent, and the expectation for 2012 remains at 8 percent. While the
country’s GDP is lower than its 2010 high of 12 percent, it is helpful
to put this in context with global growth. “Comparatively, it looks like
strength—not weakness,” reiterates ISI.
What’s important for investors to realize is that the combination
of a ramp up in targeted fiscal spending combined with broad-based
monetary easing is a positive dynamic not only for China—but for the
global economy as a whole.
----------------------------------
John Derrick contributed to this commentary.
—Internet
