AlphaShares' Adams Sees Chinese Growth Slowing but Remaining Strong in 2009

Mark Adams is director of research at AlphaShares in Walnut Creek, Calif. The money management firm specializes in developing investment strategies centering on Chinese markets for U.S.-based investors. Besides creating its own indexes, the firm also serves as advisor of two China-focused exchange-traded funds sponsored by Claymore Securities (TAO and HAO).

IndexUniverse: What's in store for China in the new year?

Mark Adams (Adams): China is in the best position of just about any country around the globe to come out of this global recession. At the end of November, its stock market was down more than 50%. It has rebounded a bit since then. But GDP growth in China will probably be the highest in the world among the major economies in 2009.

There are a lot of estimates floating around, but we're expecting GDP growth to wind up in the neighborhood of 5% to 7.5% by the end of 2009. That should still be a faster growth rate than most other Asian economies, including India.

IU: What sectors look like the best prospects going forward?

Adams: Similar to the U.S., anything related to infrastructure. The Chinese government has plans to keep boosting spending on everything from highways and roads to hospitals and schools. So construction, heavy machinery and industrials in general should do well in the new year. And it's important to remember that the government still has a lot of reserves to use, so they have a lot of weapons left in their arsenal if the economy remains sluggish.

IU: How is the real estate market doing in China?

Adams: It's hurting, although certainly not as much as in the U.S. But prices have been falling and the government is putting in place policies to stimulate that market as well. Property prices in 70 of the country's largest cities dropped 0.5% in November compared to the previous month. It's important to note that some areas seem to be experiencing larger drops and are clearly in worse shape.

IU: What caused that real estate downturn?

Adams: The government had been trying to put the brakes on a rapidly expanding property market. Just as they were really applying the pressure in terms of enacting those policies, however, the global slowdown spread to Asia.

IU: The drop in real estate prices in China hasn't been as severe as in the U.S., has it?

Adams: No; they're not experiencing massive foreclosures or anything like that in China at this point. But we still think Chinese real estate prices could drop more. On the positive side, the government in late November enacted the largest interest rate cut in 10 years. That should filter throughout the economy, including real estate markets. And the government is also starting to come out with new tax breaks to directly stimulate real estate sales.

IU: Manufacturing in China is also in a state of transition, isn't it?

Adams: The manufacturing sector is clearly slowing down. China was a place people used to go to find cheap labor. But wages have gone up and workers are moving into more urban areas to find better paying positions these days. And we've seen manufacturers climbing up of the technology ladder—in some cases very rapidly. Companies are moving up the value chain as their customer bases grow to tackle more-complex industrial processes. So, yes, the Chinese manufacturing sector is undergoing a great deal of change.

IU: Do you have a sense of how much manufacturing will grow in the future?

Adams: Estimates tend to be all over the map. In fact, some people are estimating that overall GDP growth will finish in 2009 at closer to 3%. Of course, we think it's going to be higher. So there's still a big question mark surrounding both China's manufacturing sector as well as the country as a whole. Nobody can get their arms around how much the U.S. slowdown will impact Asia in the coming year. The tide is clearly still moving away from shore, and it's not easy to determine at this point how far it will keep going out.

IU: What's the good news then?

Adams: Again, as noted earlier, China still has over $2 trillion in reserves. The stimulus package they've announced on a relative basis is four times what we've done so far to spur our economy in the U.S. And that's only counting China's plans for its first set of stimulus programs.

You've also got to remember that the Chinese consumer isn't like those in the U.S. People over there still are saving about a third of their income. When they buy cars, they usually pay cash. And for home financing, they almost always put down 30% or more.

The bottom line is that we're buying bad loans while they've already started to rebuild their economy. So they haven't had to backstop losses before moving forward. That's a huge advantage in such uncertain times.

IU: Is China's growth story gaining more viability with foreign investors despite a slowdown in economic fortunes?

Adams: Absolutely. The Chinese business model is looking a little bit better every time we're forced to bail out another company and industry in the U.S. We've seen a lot of comments recently in the media by economists and other financial experts about how the U.S. and China seem to be moving in opposite directions from an economic development standpoint.

In the U.S., the government seems to be getting its hands involved in more and more private companies. At the same time, China is continuing to privatize its whole economy. The Chinese government still owns most of the bigger companies. But they've sold a lot off and have let foreign investors in.

So we believe China is moving towards striking more of a balance between private and public corporate ownership. But it's going to take time and isn't going to happen overnight. The Chinese tend to move very slowly and cautiously.

Comments

[huangthomas:]

China needs to have annual GDP growth of at least 7.5% to keep social stability. If the growth is less than +5%, it is in recession and the unemployed would rock the social stability. The stimulus package, $600 billion over 2 years, is expected to lift GDP 1.5% to at least 8%.

In 2009, China may need additional stimulus if world economy does not pick up significantly. The local (provincial) governments have proposed a $2.4 trillion stimulus package, which may maintain GDP growth at 8 to 9%. A growth of 3% is simply unacceptable politically.

Foreign exchange reserve of $1.8 trillion is not a budget surplus. China is already in deficit spending. Deficit as the percentage of GDP is extremely hard to figure out, but the size is probably manageable. For example, the $600 billion stimulus will come mostly from loans from the state-owned banks.

2008 Dec 24 01:14 PM