Monday 22 June 2009

As China forecasts rise, is the joke on investors?


Almost everywhere you looked last week, people and organisations were scrambling to revise up their forecasts for China’s economic performance.

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Guanyu said...

As China forecasts rise, is the joke on investors?

Tom Holland
22 June 2009

Almost everywhere you looked last week, people and organisations were scrambling to revise up their forecasts for China’s economic performance.

On Thursday, the World Bank said it now expects the mainland’s gross domestic product to grow by 7.2 per cent this year. That’s a good deal faster than the 6.5 per cent rate it predicted back in March.

The World Bank was not alone in having second thoughts about China’s economic prospects following the recent massive increase in state-directed bank lending. Last week, Standard Chartered raised its 2009 GDP growth forecast to 7.4 per cent from 6.8, while economists at British bank Barclays jacked up their own forecast to 7.8 per cent from 7.2. Nomura predicted an 8 per cent rate this year, and increased its 2010 growth forecast to 10 per cent from 8.5 per cent.

In revising up their numbers, the banks are belatedly concluding what many equity investors decided months ago: that China is heading for an early V-shaped recovery in its economy thanks to Beijing’s stimulus efforts. As a result, they have pumped tens of billions of US dollars into the stocks of mainland companies listed in Hong Kong, pushing the H-share index up by 60 per cent since the beginning of March.

Not everyone shares their rosy view of China’s economic outlook, however. In a research note sent to clients last week, Albert Edwards, chief global strategist at Societe Generale in London, argued that investors’ confidence in the mainland’s economy is dangerously misplaced. “The markets are relying on a combination of hype, lies and wishful thinking,” he warned.

Mr. Edwards is worth listening to; he’s been right about this sort of thing before. Back in 1996, he criticised the economic policies of Malaysian Prime Minister Mahathir Mohamad, denouncing his government’s focus on generating high growth rates while ignoring the danger of a swelling current account deficit as “Noddynomics”.

Horrified at the damage such an insult would inflict on its Malaysian business, his employer at the time - Dresdner Kleinwort Benson - recalled and promptly pulped the offending report, and issued a grovelling apology to the Malaysian government.

Just over a year later, however, the flimsiness of Mr. Mahathir’s policies was brutally exposed by the Asian financial crisis, as output contracted viciously and Malaysia was forced to devalue its currency.

Mr. Edwards has made some other good calls, too. As the dotcom bubble inflated, he warned that investors’ earnings expectations were wildly unrealistic. And two years ago he advised clients to get out of equities, having earlier warned that US economic growth was based on “Kilimanjaro-like mountains of debt”.

Now, Mr. Edwards is casting his sceptical eye on China’s economy.

He dismisses the official data for GDP growth - 6.1 per cent year on year in the first quarter - as “simply a lie”. Instead, he prefers to look at more reliable indicators like industrial profits, which were down by 28 per cent year on year in April, and electricity production, which was down by around 3.2 per cent (see charts).

He’s not alone in doubting official numbers. Last month, the International Energy Agency noted the discrepancy between China’s claimed increase in GDP and its falling oil demand, which slumped 3.5 per cent in the first quarter. The IEA went on to question the accuracy of the GDP figure, drawing a withering rebuke from the National Bureau of Statistics.

For the time being, most investors prefer to believe the official data. But Mr. Edwards believes that they have fallen victim to a “bullish group think on China” that many will come to regret.

“In a few years’ time, I believe we will look back on the Chinese economic miracle as the sickest joke yet played on investors,” he warns.

Not so much Noddynomics, more Noddyvesting.