The good the bad and the ugly

The good news is that the Chinese now have plenty of room to move in stimulating their economy. Nobody would have imagined this luxury this […]


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By :  ,  Financial Analyst

The good news is that the Chinese now have plenty of room to move in stimulating their economy.

Nobody would have imagined this luxury this time last year and yet the world has not come to an end. Inflation is well within the PBOC’s 4% target range, printing at 2.2% last month compared to the same period last year.

What we need to keep in mind with inflation is that it measures the rate of change, not an exact level. Last year saw huge price increases, many said these were unattainable.

Today’s data shows that prices are up, even only modestly, on last year’s levels. So the Chinese economy is not dead, it’s not in a slumber. It is growing, albeit at a more sustainable pace. You can’t have 2% inflation without reigning in growth levels elsewhere. That’s the good news.

The bad news is that any move to start stimulating the economy – like the recent rate cuts and reserve ratio cuts – will have consequences and property prices are an area which the government is trying hard to restrict.

Prices rising too high in a short period of time are bad but not as disastrous as prices collapsing. So it’s a bad consequence but one which can be managed. We wrote last week about the modest increase in Chinese property prices despite the bears like Jim Chanos saying a collapse is near.

There is no collapse for now and in fact the government is so worried about rises becoming unsustainable towards the end of the year that strict measures are being put into place to limit speculation.

The names that should do well will be financials, exposed to the increase in activity that lower rates bring which clipping fees on higher transactions as the region continues to emerge as the key global economic zone.

The regional banks have been sold down recently, but they are finding solid support. Not all, but generally the financials are holding up reasonably well considering the liquidity concerns in Europe and the sluggish growth prospects in the US.

The ugly side lies in the earnings of growth stocks, like Iluka Resources for example – a mineral sands producer listed in Australia, which today came out with lower production numbers citing less confidence among customers.

The stock was trading 23% lower at the time of writing. There will be other ugly reactions among companies reporting over the next few weeks who cite a similar reluctance by customers to progress with large investment decisions.

Company managers are finding themselves in an awkward position – they understand the fragile state of the global economy but know that spending and investing won’t necessarily solve their problems, hence the paralysis and the impact on corporate earnings.

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