Also, short-term US rates have been rising recently, especially following comments from Dallas Fed President Richard Fisher suggesting that the Fed may begin to raise rates “early next year, or potentially sooner”.
Chinese equities have been notable outperformers over the past five days, with the A-shares index climbing 5% over that period. The jump in the HSBC China “flash” PMI last week highlighted the effects of the Chinese government’s targeted measures, and that rise is likely to be echoed in the NBS manufacturing PMI later this week; our economists forecast a rise to 51.2 (consensus 51.3).
The levels in Fixed Asset Investment driven industries have picked up slightly relative to H1. As China’s early-stage “growth centres,” Shanghai and its neighbouring regions are now starting to show signs of slowing economic growth, but there are no major indications of sharp deceleration (unlike in the northeast provinces of Heilongjiang and Liaoning).
Strong growth in automotive is offsetting weak demand for property (for now). Companies with high product specifications, low costs or better funding are gaining market share at the expense of weaker ones as growth rates slow. The prospect of SOE reform was a hot topic of discussion among most of the managers we met and was generally welcomed.
Demand for basic materials and fixed asset investment growth is heading for a soft landing in China, according to most of the stakeholders we met during the seventh installment of our “Enter The Dragon’s Den” series of field trips (The Good, Bad and ‘OK’ China – with a sprinkling of SOE reform). As usual, the trip was concentrated in a particular geography – Eastern China this time (Shanghai, Jiangsu and Anhui provinces). Below, we describe our key takeaways.
The overall growth picture was balanced between strong growth from automotive, railway infrastructure projects and weak demand for property. This contrasted with our February field trip to South West China, which is posting the country’s fastest growth rates (ETDD#5 – Wrap-Up: Western development, urbanization, SOE reform: mix of old & new models), and our visit in May to the northeast, which was experiencing a significant slowdown (ETDD #6 – Wrap up – ‘So bad that it’s good’ – yet?). In our view, Eastern China is showing signs of a ‘steady soft-landing’ in end demand for most basic materials.
Producers cited across-the-board automotive demand – especially for passenger cars – as the strongest area of growth – as did suppliers (eg, Baosteel is ramping up production of automotive steel, which accounts for a third of its output, and Weifu High Tech, which provides catalytic converters to the automotive sector for NS-IV compliance, is running at 100% of capacity). Meanwhile, weaker demand from the property sector has begun to affect cement and, to a lesser extent, commoditized long products in steel.