Recent developments enforce our positive stance on MSCI China: Data show the improving trend of domestic demand continuing, with property, auto sales and consumer demand at strong levels with sequential improvement. FAI is holding up well, supported by the government stimuli. More infrastructure projects have started and more are in the immediate pipeline. March NBS-PMI may go above 50 for the first time since Jul-08, indicating that manufacturing is now in an expansion phase. Loan/credit expansion stayed robust. We expect this year’s total newly made loans to exceed Rmb7 trillion, or more than a 20%Y/Y loan growth. There are signs that China’s domestic demand recovery has started to positively effect economies such as Taiwan and Korea. Chinese officials have recently indicated that from March, exports demand have shown initial signs of stability.
We had pointed out three major risks to China’s economic recovery:
1. deflation expectation;
2. worsening of external demand/exports;
3. policy complacency.
It seems these risks have reduced somewhat recently. The Fed’s quantitative monetary easing has weakened the dollar and sent commodities/resources prices higher. Such developments should help to cut the risk of deflation expectation in China, which should further boost property sales and consumer spending. On policies, PM Wen and other senior Chinese officials recently indicated that they are worried about the risk of a continued global turmoil and worsening global outlook, and that Chinese authorities have “stored enough ammunition”. They promised that more policy stimulus, especially for consumption and housing demand, could be pushed out “at any time”.
Positives: We were encouraged by the continued, and sharpened focus on market-oriented reform by China. The latest gasoline/diesel price increase following the bounce in crude oil confirmed our view that the new “cost+margin” model for refined product prices will be strictly followed. We believe residential electricity prices would be raised to offset the impact of negative CPI, if authorities want to prevent deflation expectation. They made it clear that resource price reform would be speeded up to correct miss/under-pricing in energy/resources.
In our portfolio, we raise exposure to domestic consumption names and high beta/growth stocks, and cut weights in defensive stocks. We believe A-shares’ strong performance YTD is consistent with the above stated fundamentals.
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