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China on brink of bull market as growth accelerates

China on brink of bull market as growth accelerates

China exited 2012 with its economy accelerating hard out of a year in which it came closer to hitting stall speed than at any time since 1999, in a further tentative sign of recovery in global activity.

The country recorded the slowest full-year growth of this century, but the 12 month figure of 7.9% still beat consensus expectations of 7.7% in a Reuters survey of economists.

The Shanghai Composite index gained 1.41% on Friday, crowning a month which seems to have signalled a break-out from its two year bear run, gaining 17.16% since mid-December.  

‘Should the Shanghai gain another couple percentage points, a new bull market will be at hand, and it will certainly be a welcome relief for Chinese investors, noted Bespoke Investment this week.

‘Last month’s PMIs were upbeat and we think the recovery has a while yet to run,’ said Mark Williams, Asia analyst at Capital Economics.

The uptick was driven by a stabilisation of exports, industrial production, which was up 10.3% over 12 months compared to a figure of 10.1% in November, and retail growth, up 15.2% from 14.9%.

Two interest rate cuts and the approval of infrastructure projects, as well as the new guard inaugurated at the head of the politburo in November, have helped stabilise outlook and confidence.

Investors responded enthusiastically amid hopes the market has shrugged off its extended losing streak, but analysts were sceptical of how long China could maintain re-acceleration. They pointed out that household spending remained sluggish and the state was still doing the heavy lifting.  

‘As such, there must be a good chance of disappointment if incoming data fail to meet expectations,’ said Williams.

‘This will be an increasing risk as the year goes on if the recovery remains centred on infrastructure and real estate investment rather than consumption. Sustained stronger growth in China would require a turnaround in household spending.’

Bank of America Merrill Lynch’s China economist Ting Lu said he expected annual GDP growth to peak at 8.3% in the first half of 2013, before slowing again to 8% over the second.

‘Pro-growth policies will be extended into 2013, and big-bang stimulus will be avoided unless there is another global financial crisis,’ said Lu

‘Within the year, policy will likely be marginally tightened towards 2H on concerns of rising inflation and home prices, investment overheating and financial system risks. We expect no rate changes in 2013, and the People’s Bank of China will aim to deliver a stable interbank rate.’

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