Sy Harding: Is China’s economy, the second largest in the world, a disaster coming down to a hard landing, which has been the popular forecast for four or five years now? Or is it merely slowing from unsustainable double-digit growth of more than 12% a few years ago, to a more reasonable and sustainable pace?
This week the International Monetary Fund cut its forecast for China’s 2014 economic growth to 7.4% from its 7.5% forecast in April.
At the same time, it cut its forecast for overall global growth in 2014 to 3.4%, and for 2014 growth for the U.S. economy to just 1.7% from its forecast of 2.8% three months ago.
Investor concerns are that the twin bubbles in China’s real estate market and the nation’s credit structure, and its underdeveloped financial markets, will result in a hard landing for its economy. Those concerns have had China’s stock market in a long bear market in which it has declined 65% since its peak in 2007, and 39% from its peak in 2009.
As a result, the Shanghai Composite is selling at just 7.9 times 12-month projected earnings, down from its 5-year average P/E ratio of 11.3. Meanwhile, in the U.S. the S&P 500 has been in a powerful bull market since 2009, which has it selling at 18 times projected earnings.
Those are interesting comparisons. An economy projected to grow 7.4% in 2014 has a stock market plunged to a five-year low and selling at only 7.9 times earnings, while an economy projected to slow to 1.7% growth has its stock market at a five-year high, and selling at 18 times projected earnings.
Perhaps it is justified.
Sentiment for the U.S. economy and market is at high bullish levels of bullishness and complacency, even though the U.S. Fed is cutting back its stimulus. Sentiment for China’s economy and stock market remains negative in spite of aggressive moves by China’s government to protect and re-stimulate its economy, and impressive economic reports in recent months that indicate the moves are working.
China has been spending aggressively on the nation’s infrastructure to produce jobs. It cut reserve requirements for banks. In March, it issued rules allowing banks to sell preferred stock, providing another avenue for banks to raise their capital to healthier levels. This week it ruled that China’s banks can roll loans for “qualified” companies facing liquidity problems over into new loans, to avoid defaults.
On the economy, early this month China reported its third-largest quarterly trade surplus on record.
This week HSBC reported that its flash China PMI Mfg Index rose to 52 in July from 50.7 in June, and 49.4 in May. Within the index; new orders, new export orders, backlogs, employment, and prices all improved. It was the most positive PMI report since early 2013.