China: Good news helps calm frazzled markets

13th July 2011

Investors who had been holding their breath, can take a good, deep inhale now, as some good news has helped cheer up markets worldwide.

The good news; China's economy grew 9.5% between March and June when compared with the same three months last year, as reported in The New York Times.

Although slower than previous quarters China's GDP is still increasing way above that of economies like the United States, Japan and Europe.

Chinese gross domestic product expanded 9.7 percent year-on-year during the first quarter of 2011 and 9.8 percent in the last three months of 2010.

As the New York Times notes, much of the slowdown has been deliberately engineered by the Chinese authorities.

Over the past year, the Chinese government has tightened the ample bank lending that has fuelled growth and has also raised interest rates a total of five times since October, most recently last week.

Brian Jackson, an analyst at the Royal Bank of Canada in Hong Kong, said it expected China's growth to weaken to some extent in Q3.

But Li-Gang Liu, a China economist at ANZ Bank said Chinese exports would be buoyed by demand from Japan after the massive earthquake, investment will be supported by an ambitious public housing project and domestic consumption was likely to see solid growth.

The Financial Times (paywall) reports that Chinese GDP was still growing at a faster rate than many economists had expected and there were few signs that the world's second-largest economy faces the "hard landing" that some have predicted.

"There is only a very small chance that China's economy will witness a drastic and rapid decline", Sheng Laiyun, spokesman for the National Bureau of Statistics said on Wednesday.

The news has given markets a boost in more ways than one, according to the paper.

 Within minutes of the news commodity prices rose, haven bonds were seeing selling and the FTSE All-World equity index was up 0.2 per cent.

The benchmark had fallen 2.8 per cent over Monday and Tuesday as worries European debt had intensified, shattering risk appetite.

China's Shanghai Composite index added 0.4 per cent and the news helped push the FTSE Asia Pacific index up 0.8 per cent and S&P 500 futures point to Wall Street opening up 0.4 per cent.

"Even hard-pressed European bourses," were, the FT said, "having a less febrile day than of late, with the FTSE Eurofirst 300 down 0.3 per cent, a decline that is mainly down to New York's slight pullback after the London close.

"The calmer mood is being reflected in the euro, which is up 0.3 per cent to $1.4008, while peripheral bond spreads are contracting somewhat after hitting record wides on Tuesday."

However the price of gold has not budged, suggesting that while investors may want to be a little more experimental, there is still some safety in the yellow metal, it was last up 0.1 per cent at $1,566 an ounce.

Charlie Awdry, manager of Hendersons' Gartmore China Opportunities fund said the slowdown still needed to be acknowldeged by investors.

He said: "Signs that the economy is cooling represented a development that could allow policy makers to ease monetary policy later this year with positive implications for markets.

"Inflation remains a serious issue, hitting its highest level in 34 months in May. However, monetary tightening always takes time to have an impact and there are signs that the economy is cooling (although one month's data in isolation does not support a trend).

"Policy may thus ease in the second half of this year, a development that augurs well for the Chinese market. In May, for example, bank lending grew at a much weaker-than-expected pace while the money supply expanded at its slowest rate since 2008.

"Of course, inflation may simply plateau with a quick slide unlikely. However, if the economy is slowing and inflation does peak, monetary policy may become more accommodative, a development that could cause stocks to rerate significantly, particularly Hong Kong-listed China shares which trade on a multiple of just 10 times earnings.

"China benefits from an attractive combination of both good quality growth stocks and cheaply valued large caps."

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