We're fairly certain that being bullish on China is no longer a unique concept. The question now is can consensus continue to be right?
Taking a step back, in December of last year one of our Top 3 Macro Themes for Q1'09 was "Chindia does not exist." While Indian industrial production growth has finally turned positive in recent months (see chart), The New Reality remains - China's absolute year-over-year industrial production growth continues to both beat expectations and outperform their Indian counterparts.
Today, as we start to coagulate our thoughts on Q3 Macro Themes, we are posed with a very different question than that which we asked ourselves 6 months ago. Calling China from here is no longer about the delta of growth improving and outrunning the rest of the world. Calling China from here is more about ascertaining whether or not they can keep this momentum going.
Last week's Chinese economic data provided the latest facts, and they support an answer of yes for the Chinese bull case. If half of being right on global demand recovering in 2009 was about Chinese demand re-accelerating, the other half was about REFLATION. At a price level, we are mindful that the latter will ultimately have a negative impact on the former.
May's China data showed a continued acceleration in growth (see chart, Chinese industrial production growth shot up to +9% y/y) alongside further deflation in Chinese Consumer Prices (CPI was -1.4% y/y). This is as near perfect an economic cocktail as you can get. But perfect is as perfect does, and we need to stay on top of REFLATION's impact on both potential Chinese inflation creep, and slowing growth.
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For now, we remain bullish on China.
Position: Long China via the CAF (closed end fund)