Chinese recovery could be 'biggest disappointment yet'

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The prospect of a recovery in the Chinese economy is being treated with skepticism by some strategists and fund managers, who see the growing consensus among markets for a sustained rally in emerging markets as a false dawn.

Friday, July 17th 2009, 9:36AM 1 Comment

by Paul McBeth

Research from Societe Generale dismisses "the Chinese economic miracle as the sickest joke yet played on investors," and warns investors against believing Chinese government data that the world's fourth largest economy grew 6.1% in the 12 months ended March 31.

Albert Edwards, a strategist at SG, said Chinese authorities "smooth" data turning points, and that the first quarter GDP figure, which is touted as proof of the turnaround, was probably closer to an annual rate of 3.5%.

"The continued enthusiasm for all things China reminds me so much of the way investors were almost totally blind to the fact the US growth miracle was built on sand," Edwards said in a report. "If China is doing so well, how come Chinese company profits in the year to April are down some 30% year-on-year?"

New Zealand Funds Management, which manages more than $1 billion on behalf of financial advisers, is also cold on the Chinese hype.

Chief investment officer Michael Lang said markets have failed to correctly pick the changing sentiment three times in the last three years and he's sceptical of the sudden rush to emerging equity markets on the back a suspicious-looking recovery in China.

The appreciation of the government-controlled yuan versus the US dollar is one of the indicators NZ Funds has used in forming its bearish opinion. While the global economy was riding high, the yuan remained relatively stable, but since the downturn began, it has gained against the greenback, Lang said.

"We're more than being cautious - we're being negative," Lang said. "We will be happy to be proven wrong" about the Chinese recovery, but the indicators paint a different picture, he said.

Fund managers such as AXA Global Investors, Hunter Hall, Liontamer and Goldman Sachs JBWere have come out in support of emerging equity markets, with the Chinese recovery topping their reasons behind the push for higher yields.

Much of the bullish sentiment around China has been put down to its surge in demand for raw materials and the Chinese government's US$585 billion fiscal stimulus package, and AXA's head of investment strategy Keith Podmore said the prospect of economic growth in China had dimmed the risks associated with equity markets in emerging economies.

Paul is a staff writer for Good Returns based in Wellington.

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