Sunday, June 19, 2011

Time to re-look into China

China in my opinion will surely head for a slow down but it will not crash. It's going to be a soft landing. The purchasing manager index is emitting weakness. It has slowed noticeably and I will not be surprise when it dips below 50(signaling contractions).

The other issue with China is power shortage. This is going to get more serious during summer when people blasting their air conditioners. Electricity rationing for industrial sector is already underway. One of the culprits is not allowing market-based pricing. Power companies simply do not have incentives to produce more electricity to meet with growing demand. The drought is also impacting the output, especially power plants that relying on hydro power.

The rapid fire power of monetary tightening by China Central Bank begin to bite. Home sales value in major cities has declined 20% m-o-m in April. The pre-crisis interest rate was 7.47 and now is at 6.31%. Many expect another 0.5% hike in 2011. This and together with other measures, I believe the property market will surely get a lot of pressures.

All in all, I would think their GDP will be around 9%. At this controlled pace of growth, I would think China will have a more sustainable growth. I would think commodities prices ought to stay corrected for a while and that will provide some breathing space for producers and consumers. More gentle CPI number will bode well with equities markets.

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