Scott Redler on China from the International Business Times:
China is likely to undergo a significant slowdown in its export business in the second half of the year, as a result of the deepening debt crisis in Europe, the sluggish recovery in the U.S. (the two largest customers of Chinese goods) as well as the possible appreciation of the yuan currency.In addition to Citigroup’s warnings about weakening Chinese exports, the Conference Board also downgraded its outlook for China’s economy.
To add to the chorus, Wei Jianguo, the country’s former vice commerce minister, said China will suffer an economic slowdown in the third quarter, although he added that Chinese exporters could deal with a 3 percent gradual rise in the yuan this year.
Jinaguo also estimated that China’s trade surplus would at least be cut in half in 2010 and could shrink to as little as $50 billion from almost $200 billion last year.
Scott Redler, chief strategic officer at trading firm T3 Live, says the imminent decline in China’s export activities signify a “a rebalancing” of global economies, as nations around the world try to work through the excesses of the 2007-2008 credit crisis; and awaken to a new reality.
“The market mini-crash we saw in the U.S. in April-May and the sovereign debt problem in Europe really hasn’t hit China yet,” he said.
“But now it realizes that it can’t sustain the kind of export growth they have enjoyed if European and American consumers scale back and are less willing to keep buying Chinese products.”
Indeed, China’s exports leapfrogged 48.5 percent in May from the year-ago period, the largest such monthly gain in more than six years. Such growth is simply not sustainable.
China’s export volume “won’t fall of a cliff” Redler adds, but the country faces many headwinds in the third and fourth quarters of this year and perhaps well into 2011.
“Joblessness in the U.S. will likely remain at the 10% level, the U.S. housing market is still fragile, and many European government have proposed or enacted severe austerity programs,” he noted. “This will create some significant problems for China, which has largely been an export-driven economy.”
China, however, will still remain the world’s number one exporter, Redler indicated, although smaller countries like Vietnam and South Korea may seek to take up some the slack.
GDP, which has annually grown by 10%-plus in China, is likely to fall as well – a Bloomberg survey forecasts Chinese economic growth of 10.2 percent this year and 9.2 percent in 2011.
Jianguo believes year-on-year Chinese GDP growth will slow to 8% to 9% in the third quarter, from around 10% to 11% this quarter, and then fall to between 7% and 8% in the last three months of the year.
Redler also believes that a slowdown in Chinese may not be a bad thing at all – considering that the Chinese government has been concerned about its economy overheating and the specter of inflation.
In fact, the Chinese authorities have already taken prudent actions by imposing curbs on property speculation (to put the brakes on a red-hot real estate market); while the central bank has raised banks’ reserve requirements to the highest level in at least three years to tamp down investment growth after Chinese lenders handed multi-trillions of new loans in 2009.
Property prices in China climbed a lusty 12.4 percent in May from a year earlier, after April’s 12.8 percent record gain.
“They saw what happened in the U.S. with bank lending and housing; and they’re trying to avoid that,” Redler said. “The banks in China are now basically making it a little harder to buy property or get a loan. It’s tough medicine, but it’s a longer-term positive for their economy.”
Chinese stocks have taken a beating so far this year – The Shanghai Composite Index has dropped about 26% year-to-date, making it one of the worst global equity performers.
“But that 26% correction seems quite reasonable, given how their stock exchanges skyrocketed in 2009,” Redler commented.
Indeed, from early November 2008 to the recent market peak in August 2009, the Shanghai index doubled in value. Although the index has steadily fallen since then, it still remains about 42% above the November 2008 lows. The Shanghai index now trades at a P/E of only 18 (versus 33 at the start of the year).
“If investors wanted to enter a long-term investment in China, this area would be a good entry point,” Redler said.
However, there are some conflicting views on the near-term prospects for Chinese stocks. Citigroup believes equities will trade “range-bound,” while Nomura Holdings Inc. gave China the “bullish” on prospects of the yuan strengthening.
In any case, one will surely find fewer Chinese-made goods at your local Wal-Mart this year.
