Chinese government views stability as top priority for 2012
Last month’s annual Chinese conference on macroeconomic policy made it clear that the government’s top monetary policy priority has shifted towards one that promotes stable economic growth, rather than fighting inflationary pressures. However, there is little to indicate that anything more than a gradual easing, with a pro-active fiscal policy and prudent monetary policy, will be used to guide the economy towards a soft landing. In this context, Chinese equities may begin to reverse their significant underperformance versus global peers, with more sustained performance dependent on developments in Europe and stronger rates of global growth.
Growth stability becomes top priority
The theme for this year’s Central Economic Work Conference, which sets China’s macroeconomic policy, was “progress amid stability”. The government conference, which ended on 14 December, focused on three macro policy objectives (in order of priority):
The primary motivation behind all three objectives is the maintenance of social stability, especially in a period when political power in China is changing hands.
A soft landing is the most likely scenario
We expect China’s GDP to expand by 8.0-8.5% in 2012, slowing from an expected 9.0% increase in 2011.
Nevertheless, the lack of pre-emptive and aggressive policy measures leaves any risk of slower-than-expected economic growth skewed to the downside. While the recently released HSBC/Markit flash manufacturing purchasing managers’ index for December improved slightly to 49.0, from 47.7 in November, two consecutive sub-50 readings confirm that the trend towards weaker domestic demand will persist into early 2012.
The conference confirmed that Beijing will maintain a “proactive fiscal policy” and “prudent monetary policy”. Conference participants added that, if necessary, there will be additional fine tuning to steer the Chinese economy towards a soft landing. The press statement from the conference also mentioned that policies needed to be “consistent and stable”, which suggests that any monetary easing will be gradual and moderate. A repeat of 2009-style aggressive monetary stimulus is unlikely in 2012, as managing inflation expectations still remains an important macroeconomic objective.
Rather, the government will seek “well timed and measured pro-active fine tuning” of monetary policy, and will deploy various tools to achieve this goal. We expect the People’s Bank of China to further reduce the required reserve ratios for banks by 100-150 bps in 2012, but we do not expect cuts in benchmark interest rates or a rapid acceleration in bank lending.
On fiscal policy, we expect to see an overhaul of the taxation system, as well as increased spending on infrastructure projects and social welfare. The taxation overhaul may include measures such as combining corporate and value-added taxes, seeking a better balance between central and local government revenues, and reducing consumption-related taxes.
Lastly, the conference reiterated the government’s intention to curb property price increases, and indicated that a property tax will be introduced in more cities; there are currently pilot programmes operating in Shanghai and Chongqing. The government also pledged to increase property supply through the construction of affordable housing.
Equities should be supported in 2012
For Hong Kong-listed equities, volatility will likely remain high in 2012, as worries relating to the European sovereign debt crisis remain at the forefront of investor concerns. In this environment, we believe high-quality defensive and high-dividend equities should deliver more favourable riskadjusted returns in the first half of 2012.
Among sectors, consumption-related sectors remain our secular preference. In addition, for the coming two quarters, banks may perform slightly better than the overall market due to potential cuts in the reserve requirement and moderate increases in lending.
Since early August 2011, the MSCI China index has underperformed the global equity index by about 7%. However, continued Chinese economic growth, coupled with gradual policy easing, should support Chinese Hshares in 2012 and help them to reverse the underperformance of 2011.
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