China – China mainland is going from upbeat to real bid……

Hang Seng (13.769)  Shanghai B (141,00)  USD/CNY (6,8325)

Shanghai B is up from 126,50 to 141,00 on the week (11,5%) and up more than 50% since November last year.

This is serious for a bear like myself. It would not be trustworthy just to keep a target on the downside without reacting on the developments. I remain skeptical but raise the target from 90 to 110 for Shanghai B.

The current development is very tricky as we have the Communist Party using all possible methods to create a turnaround feeling, hungry Chinese investors buying A shares sending B shares higher as well, foreign investors jumping on the B wagon. All partly based on some official data combined with rumours, where the last part paints a worrisome picture.

As mentioned last week, we are playing on the same hand as Chinese government if we buy Chinese mainland stocks because the government influence the economy so strongly. So I will try to highlight the supportive measurements that are initiated but also what developments we should worry about.

The current growth incentives that the government is taking are CNY 130 billion investments primarily in rural areas (this is a batch of the CNY 4 trillion package, I can provide you with the details if any interest). Additional support have been given to the following sectors, machinery builders, textile (though less increase in export rebate than expected), automotives and future measures are soon to be announced for electronics and the real estate sector.

The banking sector is expanding after lending restrictions were lifted. This must give stimulus impulses, certainly in the stock market.

Now, many are very happy about the expansion in banking lending as it signals new growth. Can we trust the figures? Yes. What do they show? We don’t know……..This what some say. In reality is bank lending not expanding at all. 25% of the increased lending in January was provided by one bank to power grid, railway, road and hydroelectric power projects plus a large portion to discounted bills to small and medium companies.

The project finance is apparently hunted by all Chinese banks due to the stable returns (and very smart with the Chinese government supporting these projects). The discounted bill business is fine, but it is basically just providing working capital to existing business in a corporate world where liquidity seems to bee tighter.

Some sources claim that under the lending restrictions during 2007 and 2008 bank lending was taken off the balance, and this lending is simply coming back on the balance sheet again. And last to the unofficial lending market. A couple of times I have mentioned that hot money are leaving China, which corresponds well with less activity in the unofficial credit market (25% -33% of the total market).

Wenzhou is the capital of informal banking in China. Very funny can some analysts out People’s bank of China branch data from Wenzhou see that the unofficial lending is shrinking.

The conclusion is that lending is not growing as the figures suggest, maybe not at all. It correspond well with the PMI numbers for January that went up from 41,2 in December to 45,3. Is was widely celebrated as a turnaround but it is contractive as long as it stays below 50,0 (the employment component actually was lower).

Of the companies listed on Shenzhen Stock Exchange that so far reported the result for last year, 20% suffered losses, which for many companies was the first time. Among the profitable firms around half experienced a deteriorating profit.

That happens these days, but where there is a concerning Chinese twist is regarding lay off’s. Companies in China are now urged to maintain jobs. This is mainly a subject for government owned companies but also spilling over to private owned companies.

I respect that if enough investors believe that the market will go up, then it goes up. It can be that the Chinese government can change the development, but the stakes have grown very large pretty fast. Not only regarding the stimulus package, but also the “official intervention” towards private companies in attempts to avoid social unrests and further economic downturn.

I still go for a downwards correction in equities, but respect that the chips on table now is a high rolling game. One day the China turnaround is reality, but I fear that people betting on fast recovery are cashing in before we have seen all hands.

The Hang Seng target is unchanged.

Targets: Hang Seng 11.000     Shanghai B 110

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