Saturday, 12 January 2013

China recovery unsustainable, stocks to rise

Recent signs of improvement in China's economy was marred on Friday by a report showing that China's inflation accelerated in December for the second straight month to 2.5 percent, the highest since May.

For 2012 as a whole, though, China's inflation rate slowed sharply to 2.6 percent from 5.4 percent the year before.

Despite the lower inflation, analysts see little scope for further monetary stimulus.

“The central bank is concerned about underlining inflationary pressures and it is one reason they have not cut more aggressively,” Ben Simpfendorfer, managing director of Silk Road Associates, told AFP. “So the biggest risk is this is actually a restraint on policy makers' ability to support the economy, either through rate cuts or through more stimulus.”

“The central government may come under pressure to tighten controls on the property market once the sector shows signs of heating up, which will definitely affect the pace of the overall economic recovery,” said Yao Wei, an economist with Societe Generale.

Indeed, James Gruber at Asia Confidential thinks that China's economy has become “more lopsided” than ever and that the recent recovery is unsustainable. “While government measures to stabilise the economy have worked in the short-term, they may be sowing the seeds for a more serious downturn later on,” he said.

Despite his pessimism on China's recovery, Gruber thinks there is reason to be optimistic about China’s stock markets.

The Chinese market probably has 10-15% further upside from here. The reasons are . . . reasonable valuations coupled with obvious potential catalysts from structural reform via new leadership. To those reasons, I would add another: a wall of freshly-printed central bank money looking for a home, making likely targets of laggard markets such as China.

Meanwhile, one stock market that has been doing well recently is Japan's. The Nikkei 225 rose 1.4 percent on Friday, capping its longest weekly winning streak since December 1988, after the government unveiled a 20.2 trillion yen stimulus plan.

Economic data from Japan on Friday had been mixed.

A fall in exports pushed the current account balance into a 222.4 billion yen deficit in November, the first time since at least 1985 that it has been in deficit in months other than January.

Encouragingly, however, the economy watchers survey revealed improved service sector sentiment in December. The index for current conditions jumped to 45.8 from 40.0 in November while the future conditions index surged to 51.0 from 41.9.

The US trade deficit also widened in November. However, with exports rising 1.0 percent and imports jumping 3.8 percent, this probably signals a pickup in growth.

Indeed, in the UK, industrial production rose 0.3 percent in November after having fallen 0.9 percent in October.

Still, that did not stop the National Institute of Economic and Social Research from seeing a 0.3 percent contraction in the UK economy in the fourth quarter.

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