European progress toward a resolution to their debt crisis will also help China in its efforts to engineer a “soft landing” for the Middle Kingdom’s export-driven economy.
European officials have reportedly been courting the Chinese for months now, hoping to win a financial commitment from the growing global powerhouse. With nearly $3 trillion in currency reserves, China is one of the few entities with the financial strength to help European stocks rebound. China also has a vested interest in seeing the eurozone stabilize because Europe consumes 25 percent of its annual exports.
Beyond exports, the Chinese government is also taking steps to boost its domestic economy. On November 30, the People’s Bank of China (PBOC), China’s central bank, announced that it had cut the reserve requirement for the nation’s largest banks by 50 basis points. That marks the PBOC’s first monetary easing in three years and it’s clearly aimed at shoring up the nation’s economy. We suspect that this was simply the first step in a broad program of monetary and fiscal easing which will likely run at least through the first quarter.
However, China’s policymakers aren’t in a position to pursue measures quite as economically stimulative as in years past; between 2008 and 2011 the PBOC grew its balance sheet by about $1.5 trillion while commercial bank credit expanded by more than $4 trillion. But a wide range of stimulative policy options remain available and with inflation in China currently running at a 14-month low -- and expected to fall further in coming months -- the central bank has a relatively free hand at this point.
Further reductions in bank reserve requirements are the most obvious blunt instrument in the PBOC’s toolbox, so we expect to see another cut in the coming months.
China’s central government had been worried about the formation of a real estate bubble and the impact that it could have on domestic inflation. So over the past year and a half, Chinese authorities have been moving to cool the real estate market by requiring higher down payments or higher interest rates on home loans. These measures have achieved a slowdown, as evidenced by a decline in residential real estate transactions in 27 of China’s 35 largest cities.
With real estate prices down by double digits in many of its major markets, China is widely expected to begin loosening its stricter real estate policies, though the timing of these actions is in question. There’s also concern that the pace of Chinese construction over the past few years has left a huge overhang of unsold properties that will likely keep real estate prices depressed for at least another year.
But according to news reports, there is a healthy debate going on within the central government as to whether it should “reheat” the real estate market. One of the most common criticisms of the Chinese real estate market is that it’s too difficult for middle class Chinese to afford property. Officials on one side of the debate believe the government should do more to help middle class families buy homes, while other officials believe the real estate market should be further dampened. At the moment, it’s unclear which side’s arguments are likely to prevail.
Despite this cautious stance toward Chinese real estate, I remain bullish on Chinese equities even though their recent performance has been weak.
Although economic growth has slowed in China -- GDP growth this year should be somewhere around 9 percent versus more than 10 percent last year -- it is still outpacing all of the developed nations. The current consensus forecast for 2012 Chinese GDP growth is 8.5 percent versus just 2.1 percent in the U.S. and Japan, and what might be an overly optimistic forecast of 0.4 percent growth in the eurozone.
At the same time, inflation is expected to cool markedly from just over 5 percent this year to 3.1 percent in 2012.
With healthy growth and low inflation, the Chinese central government has plenty of room to take stimulative measures to keep GDP growth in the neighborhood of 8 percent for some time to come.
Due to the fact that China will remain a key driver of global economic growth, I remain bullish on Market Vectors China ETF (NYSEARCA:PEK).
Weaker corporate earnings outlooks have been the most significant drag on Chinese equities; the slowing property market and the European debt crisis have shaken earnings forecasts. But as noted earlier, I expect progress to be made on both fronts in the coming year.
Market Vectors China ETF tracks the CSI 300 Index, a local market capitalization-weighted index designed to represent the 300 largest, most liquid shares traded on the Shanghai and Shenzhen bourses. It is also designed to exclude shares that exhibit higher-than-average volatility or suspicious signs of price manipulation. Market Vectors China ETF is the first U.S.-based ETF offering exposure to this index, and allows American investors to tap into the broader Chinese markets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.