China bull vs. bear heats up
From Macro News Dec 6 2011 BY: Esther Armstrong
, Senior Reporter
, Portfolio Adviser
A fall in PMI figures and the start of a loosening cycle from the PBOC have reignited the debate on China and whether its economy is due a hard or soft landing next year...
Rupert Watson, head of asset allocation at Skandia Investment Group, thinks Chinese equities will still outperform other equity markets in 2012, despite signs of slowing growth.
He said last week's cut in RRR shows the Chinese government is aware of the risks to the economy from developments both within and outwith the country.
"Having spent the last year with the primary focus on reducing inflation, the PBOC is likely to spend the next year trying to ensure that a hard landing is avoided," he added.
Many commentators regard China's battle with inflation to have been successfully won and see inflation falling to as low as 3% by the middle of next year.
If this is the case the PBOC will have a lot more room to loosen policy if it needs to.
"While China has been clear that it is not in a position to be able to rescue Europe, it is at least able to rescue itself should that prove necessary," Watson concluded.
Bears grow in number
Hugh Yarrow, fund manager of Wise Investment's Evenlode Income Fund, couldn't disagree more.
"The PBOC is leveraged 1200 times, it can recapitalise a bit easier than we can in the West, but even the Chinese government has its limits."
In addition, he said there is unquestionably a bubble in China's housing market and the situation of such reliance on construction to fuel economic growth in a country is unprecedented.
This bubble could take years to emerge fully, but if it does deflate he said it could be quite good for Western economies because commodity prices will no longer be driven skyward.
Ultra-bear Albert Edwards, strategist at Societe Generale, has also come out on the side of a hard landing in China and sees it as one of the biggest investment shocks in 2012.
"The crucial driver investors are missing is the change in global liquidity as measured by growth in EM foreign exchange reserves.
Confidence often ebbs as growth slows and EM economies are seeing a sharp drop in reserves and liquidity tightening," Edwards explains.
Investors desperate to believe
He added the main problem is that investors are desperate to believe the EM and Bric growth story because there are so few alternatives out there at the moment.
"The story of superior growth for the EM universe is as entirely plausible as it is entirely misleading. When you look at the evidence, there is absolutely no correlation between investment returns and economic growth because investors overpay for growth stories and there is no margin for error," he finished.