27 May 2016

Making sense of the often conflicting stream of Chinese economic data is not always easy.

But by the looks of the companies that do business there, we can see an alternative view of the Chinese economy – one that offers more optimism than much of the gloom that markets are currently adhering to.

Positive soundings

We came to this view after looking at the reports from companies exposed to the Chinese industrial and construction sector on business in the first quarter of 2016.

The key theme we’ve uncovered is one of persisting positivity. Driven by Tier 1 and Tier 2 residential segments, as well as fixed asset investments – such as airports and high-speed rail projects – the outlook from management teams for the full year is increasingly optimistic.

Certainly, we believe there are several challenges still in place. Lower Tier Chinese cities still suffer excess housing inventory levels (18 months vs 8-12 months in higher Tier) and wider concerns over the prosperity of heavy-side industrial companies remain.

Despite this, another message that resonated strongly from our analysis was the growing confidence in government intervention to stimulate construction activity.

A welcome intervention

Several key players in the market noted during conference calls that the state is beginning to initiate more sensible measures to manage growth – a theme that our team on the ground in Hong Kong reaffirms.  

The government has been cooling housing prices in Tier One cities such as Beijing and Shanghai by becoming far less hostile towards developers and encouraging them to build. Other measures, such as targeting M2 money growth of 13% and reallocating non-performing loans from zombie businesses to high quality companies with genuine growth prospects, are also helping stimulate growth on a far broader scale.

Looking to the wider picture

This optimism from companies sitting within such a cyclical sector offers a welcome tonic to the general feeling of anxiety towards China from the markets.

The government’s well-received intervention into the housing sector bodes well given the work needed to successful transition the country from an investment-driven economy to one powered by consumerism. Although China’s five-year plan to implement this shift is aided by consumers’ ability to gear up and take on mortgages – providing further support for its housing market – increasing the urbanisation ratio from 56% to 60% won’t be easy.

While it remains difficult to gauge the sustainability of China’s intervention and whether it can successfully complete this transition on schedule, there are signs of a  stabilisation within the industrial and construction sector.

From what we can see, companies appear optimistic about the government’s ability to manage growth moving forward and appear to be positioning themselves accordingly. Setting aside the obvious current economic weakness in Brazil at the moment, the industrial strength we see in India and South East Asia lead us to believe that emerging markets are arguably doing better than we might think – with China at the very heart of this growth.

CARS ref: UKRSM-0130

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 02/03/2016 and may change as subsequent conditions vary.

We see more optimism than much of the gloom that markets are currently adhering to.