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According to a Barron's article (subscription required), the Chinese economy is suddenly re-accelerating. Here are the key points:


Despite efforts to slow the Chinese economy, there's evidence that growth has increased:

  • China recently reported that industrial output grew 16.9% over the January to February period versus last year.
  • This could lead to greater efforts to slow the economy.
  • Higher rates will likely bring more capital inflows, raising speculation that
    China will revalue its pegged currency.
  • This view increased on news that China's trade surplus
    totaled $11 billion in January and February, versus an $8 billion
    deficit in the same period in 2004.

Goldman Sachs (ticker: GS) reaffirmed its long-held view
of a 5% upward revaluation:

  • According to GS, a revaluation would be
    "largely positive" for Chinese equities.
  • Would Increase
    book values and boost profits for selected companies.
  • Most likely to gain are Sinopec Zhenhai Refining & Chemical, Lenovo, China Petroleum & Chemical, China Eastern Airlines (ticker: CEA), and China Southern Airlines (ticker: ZNH).

Wilfred
Sit, who runs the Greater China Fund (ticker: GCH), a NY-listed closed-end fund
said:

  • Economic growth to continue.
  • There was a midcycle correction, but the macro themes
    are still intact.
  • Sit is skeptical that China will revalue higher because that would lead to even more capital flows from
    speculators.
  • Lombard Associates noted that soaring exports
    have moderated China's slowdown. China will do everything it can to maintain the export advantage.

According to a new index:

  • Growth in industrial production has
    moderated since last spring.
  • Too early to suggest that Chinese industrial
    production is increasing.
  • The leading indicator is still easing.

Speculative bubble in the Shanghai
real-estate market -- much of it caused by foreigners betting the RMB will rise:

  • China tightened rates last week to slow the
    real-estate market.
  • Prices in Shanghai rose nearly
    70% between 2001 and 2004, versus an overall gain of 25% for China,
    according to UBS.
  • Average residential prices in Shanghai are
    now higher than in any other urban region in China.
  • Evidence that Hong Kong and Taiwanese investors are buying new luxury apartments.
  • UBS claims more than 75% of new luxury apartments are
    purchased by non-Shanghai residents.
  • Shanghai accounted for nearly 20% of China's mortgage lending in 2003 and 2004, even though it
    accounted for just 5% of total property construction.
  • As China moved to slow fixed-asset investment,
    property stock prices fell.
  • The hardest hit included China Vanke, Shanghai Shimao, and New World China.

Shu Yin Lee runs the Dalton Greater China, a new long-short fund that invests in Chinese
stocks. According to Lee:

  • Construction activity has slowed sharply.
  • He doesn't think there's a bubble.
  • More buyers and more users for the best properties
    downtown than supply offers.
  • Reports of speculators buying
    apartments and abandoning them are overstated.
  • The vacancy numbers have
    been coming down every year for the last five years.
  • Lee says buyers he meets are not buying to flip empty apartments.
  • Lee has focused on buying commercial real
    estate for the past six months, where yields are superior, on the
    theory that demand for Shanghai office space by Fortune 500 clients
    will continue.

Lee says buying Chinese real estate on the stock
market is a lot cheaper than buying physical real estate:

  • Dalton Greater China Fund now has
    nearly 33% of assets in property
    related equities.
Source: Barron's on the Chinese economy, real estate, and stocks that could benefit from revaluation