Up until last week most investors were arguing that China could not save the world. And we agree. China is just not big enough to drag the world out of the mire by itself. But it can save itself. Here are some of the positive developments:
a) property transactions in China have picked up across the country – most notably in the Guangdong residential market, which suffered the full brunt of the export slowdown driven by a weaker world
b) loan growth, fixed asset investment and power consumption have all moved up, showing strong indications that China’s fiscal stimulus is taking hold sooner than many could have imagined
c) PMI numbers and consumer confidence have all returned – indications of continued strong sell-through of consumer electronics and autos in China
In short, we believe that:
(1) China has a very strong structural story whose engine has already clearly been re-started by strong government action
(2) Chinese policy towards property, credit and infrastructure is already showing clear signs of traction – much sooner than generally expected – making the Chinese economy one of the few to return to near trend growth next year
(3) While the massive liquidity creation by central banks worldwide may find it difficult to make its way into the economy due to deflation fears, this is not an issue in China. In fact, we think China stands out as the clearest likely repository of liquidity flows from the rest of the world in the coming months.
China and, by implication, Asia will be the first to turn.