So what will they be tracking as they monitor the situation? We’ve heard the new Chinese Premier-to-be Li Keqiang is paying attention to three factors: power production, railroad freight volume and new bank loans.
Power production in April was slightly positive on a year-over-year basis, but still remained weak.
On May 31, railroad freight volume was released for April, and showed an increase of 3.3 percent over last year, the same reading as March.
New bank loans are down 7.8 percent year-over-year as of May 11, which we believe was the primary reason that China cut the required reserve ratio (RRR) on May 12. J.P. Morgan agrees, saying that together with the RRR cuts, “the seeming start of a new cycle of public spending and consumer stimulus should help to boost loan demand in the economy.”
Looking at the five year data above, all factors are near their lows and below their 3-month moving averages. In whatever shape or form, we expect policy easing to continue.
What appears to be overlooked by the mountain of negative economic news is the fact that China’s stock market is outperforming. In May, the A shares were the best-performing equities among all the developed and emerging stock markets we track. For the year, China’s investors still hold onto a gain of 7 percent, putting the country among the top half of the emerging markets and above all developed markets. This bifurcation may be signaling that the worst is behind us.
Keep in mind that negative news in the media may be a danger sign to some people; to Chinese policymakers, it’s a signal to act.
We believe the next government policy cycle might be just around the corner. In fact, we’ve already seen indications of stimulus from China, such as giving the “green” light to car buyers. Perhaps the European Central Bank and the Federal Reserve will follow suit to avoid a repeat of the last few summers.
This is just a preview of only a few of the points I’ll be making at the Cambridge House’s World Resource Investment Conference in Vancouver next week. Hope to see you there! If I miss you, look for the presentation on usfunds.com in a few days.
