J.P. Morgan China Conference 2009 Key themes and conclusions

J.P. Morgan’s landmark China Conference concluded on Friday, having hosted almost 1000 delegates from 30 countries. The conference included an extensive schedule of events and offered a mixed but generally positive assessment of China’s economic prospects. The sessions concerning China’s domestic consumption and discretionary spending were especially well attended by investors this year. The conference also featured several high-profile panels on the Chinese and global financial markets, with speakers including Jamie Dimon, Bill Winters, Dai Xianglong (President of China’s National Council for Social Security Fund), Dr. Fang Xinghai (Director General of the Shanghai Financial Services Office), and a panel of international financiers including Sir Andrew Crockett, President of J.P. Morgan Chase international.

The broad themes and conclusions from the conference include:
_ China’s financial markets: A number of significant financial reforms and milestone developments can be anticipated in the next several quarters. Investors can look ahead to the introduction of index-tracking ETFs in China, foreign company and red-chip listings in Shanghai, the launch of financial futures, and the introduction of more commodity futures products.
_ Domestic consumption: China’s retail sales have benefited from the stimulus boost, although many brands have to lower their expectations from the 40-50% growth of the last 10 years - the next several years may see lower double-digit same-store sales growth. Consumer spending has been especially robust with regard to “everyday essential” items. In the property sector, strong residential transaction volumes are sustainable at stable prices, while in the auto sector, J.D. Power & Associates projects that China is forecast to surpass the US with 11mm vehicles sold in 2009 vs 10.4mm in the US.
_ Property sector: the "build it and they will come" era has drawn to a close for China’s property developers. The near-term outlook is stronger for segments that rely on domestic demand (mass market residential, retail, SME-oriented commercial property) as compared to those that rely on MNC demand (e.g., grade A office space, luxury residential). The policy- riven increase in bank lending to property developers is somewhat concerning, as it has propped up otherwise distressed developers, potentially exacerbating the problem of overcapacity.
_ China’s demand for commodities: the record level of imports for a range of commodities puzzled many presenters. Record iron ore
imports, the opportunistic buying of copper and arbitrage-driven imports of aluminum cannot be sustained at such lofty levels. Nevertheless, most speakers believed that China’s stabilizing GDP and recovering industrial production is good news for commodity markets.
_ Macro fundamentals: there are strong expectations for inflation to rise in the next several quarters. With slower rates of growth likely to be the norm going forward, Chinese policy will increasingly emphasize industrial restructuring, greater energy efficiency, deployment of China’s capital to support inland development, industrial optimization, securing energy and raw materials. We can also expect an acceleration of policy-driven development of social welfare, pension schemes, healthcare and rural development.