Business Times - 31 Jul 2009
By WU ZHIJIAN
THE Chinese equity and property markets have recently been on a roll. The Shanghai A-share market has gone up almost 100 per cent since the beginning of the year, and gained an impressive 17 per cent in the last two weeks.
Housing prices in some cities such as Shanghai, Beijing and Guangzhou have also soared. There is a buying frenzy. It was reported, for instance, that more than 1,000 people queued overnight to compete for about 300 units of a development in Nanjing, pushing the selling price up almost 90 per cent in a single day.
There are a few explanations for China's asset boom. One is simply liquidity. China's economy seems to be bouncing back since the government announced its 4 trillion yuan (S$846 billion) stimulus plan last year - the biggest in the world.
Broad money, M2 and bank lending in China have been increasing at a pace of about 30 per cent year-on- year, which is more than double the pace of the US. The liquidity provided by the banks was not supposed to go into the stock or property markets, but some of it has done so.
There is thus some concern that the asset market rally is not well supported by fundamentals.
The question, however, is whether China's equity and property markets are still a buy. There are at least three reasons to take a positive view.
Firstly, the Chinese government is unlikely to slow down the quantitative easing before the end of the year. The 4 trillion yuan stimulus plan was initiated only in Q1; it will take at least 4-6 quarters to fully take effect. In fact, the Chinese government has expressed concern in public that the current rebound might only be temporary and there are still considerable risks that the economy could turn down again.
The government has repeatedly confirmed its main target of sustaining a growth rate of 8 per cent in 2009. With such a challenging objective, it is unlikely that the government will let up in its stimulus anytime soon.
Secondly, the asset markets, especially the property market in China, are supported by the actions of local governments. GDP growth plays a critical role in assessing the performance of local governments and therefore there is a vested interest among the provincial and city-level officials to ensure a well supported property market.
In fact, in some of the cities, the real estate sector accounts for more than 35 per cent of the local economy
Thirdly, there is a possibility that the US economy might recover later this year. Timing the US recovery is a tough call, on which economists differ. If the US economy does improve, however, there is a good chance that China's export machine will revive, which will further support its asset market.
Currently, this is not on the cards. But next year could see the revival of China's exports and further increases in asset prices.
Of course, all the above factors do not rule out the fundamental weakness of the Chinese economy in the long run. Any asset bubble fuelled by a liquidity boom, after all, will burst at some point. However, for the next six months at least, China will continue to offer interesting investment opportunities.
The writer is a commentator on China. He runs the website www.chinatells.com
By WU ZHIJIAN
THE Chinese equity and property markets have recently been on a roll. The Shanghai A-share market has gone up almost 100 per cent since the beginning of the year, and gained an impressive 17 per cent in the last two weeks.
Housing prices in some cities such as Shanghai, Beijing and Guangzhou have also soared. There is a buying frenzy. It was reported, for instance, that more than 1,000 people queued overnight to compete for about 300 units of a development in Nanjing, pushing the selling price up almost 90 per cent in a single day.
There are a few explanations for China's asset boom. One is simply liquidity. China's economy seems to be bouncing back since the government announced its 4 trillion yuan (S$846 billion) stimulus plan last year - the biggest in the world.
Broad money, M2 and bank lending in China have been increasing at a pace of about 30 per cent year-on- year, which is more than double the pace of the US. The liquidity provided by the banks was not supposed to go into the stock or property markets, but some of it has done so.
There is thus some concern that the asset market rally is not well supported by fundamentals.
The question, however, is whether China's equity and property markets are still a buy. There are at least three reasons to take a positive view.
Firstly, the Chinese government is unlikely to slow down the quantitative easing before the end of the year. The 4 trillion yuan stimulus plan was initiated only in Q1; it will take at least 4-6 quarters to fully take effect. In fact, the Chinese government has expressed concern in public that the current rebound might only be temporary and there are still considerable risks that the economy could turn down again.
The government has repeatedly confirmed its main target of sustaining a growth rate of 8 per cent in 2009. With such a challenging objective, it is unlikely that the government will let up in its stimulus anytime soon.
Secondly, the asset markets, especially the property market in China, are supported by the actions of local governments. GDP growth plays a critical role in assessing the performance of local governments and therefore there is a vested interest among the provincial and city-level officials to ensure a well supported property market.
In fact, in some of the cities, the real estate sector accounts for more than 35 per cent of the local economy
Thirdly, there is a possibility that the US economy might recover later this year. Timing the US recovery is a tough call, on which economists differ. If the US economy does improve, however, there is a good chance that China's export machine will revive, which will further support its asset market.
Currently, this is not on the cards. But next year could see the revival of China's exports and further increases in asset prices.
Of course, all the above factors do not rule out the fundamental weakness of the Chinese economy in the long run. Any asset bubble fuelled by a liquidity boom, after all, will burst at some point. However, for the next six months at least, China will continue to offer interesting investment opportunities.
The writer is a commentator on China. He runs the website www.chinatells.com
No comments:
Post a Comment