China – Was the credit growth in December a true credit growth ?

Hang Seng (13.256)  Shanghai B (121)  USD/CNY (6,83)

Hang Seng lost a couple of percent last week which was fine compared to the swings in global equity markets. More remarkable are the China mainland stocks where A shares are underlying supported (actually A shares are up 7,34% this year so far) and Shanghai B ended the week unchanged.

Friday Chinese stocks went up due to speculation about state support to the shipbuilding and machinery manufacturing sectors. It happens after tax cuts and other support initiatives for the automobile industry were announced earlier last week.

It shows that the current sentiment for China mainland stocks is positive and investors have appetite for China stocks. Despite my targets of lower stock indices, I have deep respect for this situation. The market is always right, but is it a short term reaction?

I think, yes it is. The Chinese economy is still heavily dependent on export (please read last weeks comments about delay in the rescue package and new budget deficits), plus despite some economic muscles, the Chinese state can’t bail the whole country out. It worries me when stocks markets go up on increased economic aid from the state.

Last Friday the People’s Bank of China came with a statement where the central bank governor Zhou Xiaochuan of curse said that they are focused on delivering stable and quite fast economic growth – this he needs to say. Zhou also said, that “China’s economy faces a harsher and more complex environment as the global economic crisis deepens in severity” – this comment would only come if it was truly needed…..

It leads me back to the Chinese December credit growth number that was taken as a relief, and even a possible turnaround in the market (certainly supported the positive bias in the stock market).

Detailed information about Chinese economic numbers is for different reasons difficult to become. It’s the same about the credit numbers, so it takes time before rumours and indirect calculations maybe crates a picture.

From what I hear, I note the following observations as important:

-          Most of the growth came from an increase in bill discounting, that include a risk of double counting. Some rumours say that companies are taking more short term funding, but not for investment purposes, apparently more because of serious cash flow problems. If these 2 things are connected, I don’t know but the latter rumour is simply very bad if it is correct.

-          The “hot money” are moving again. Until recently hot money went into China mainland through different channels. With dropping Chinese interest rates and it also is obvious that the CNY won’t appreciate within near term the “hot money” now moves out of China. I haven’t heard any numbers, but money is on the move and it leads to the below point.

-          Estimates say that 25 – 30% of the total lending in China mainland is informal. With “hot money” flows out of China one could imagine that this part of the lending system has less capital to circulate, sending borrowers into the official lending system (and the official numbers). It seems to be a public secret that a whole range of informal banks has closed lately. I don’t know the reason, but it corresponds well with the tighter informal lending system.

The combination of rising share prices on the back of growing state aid to industries, the ongoing concern from the central bank and the maybe “not as good as thought” December credit numbers confirms my skeptical view on the stock market.

I respect the wish among investors to jump on equities because it will turn the long term trend one day, but I regard it as a current optimism and keep the targets.

Targets: Hang Seng 11.000     Shanghai B 90

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