Macro Highlights February 23rd 2015

Analysis - 2/23/2015

Our Investment Research Department publishes a weekly newsletter with a round-up on the main economic developments and news flow.

Do chinese nequities reflect undue optimism?

Investors continue to view the news flow from China with rose-coloured glasses after being heartened in November by the monetary policy moves of the People’s Bank (PBoC). Year to date China’s share indices are already up 5% on average.

But regardless of their average advance, the individual benchmarks have turned in sharply different performances in recent months. While the Shanghai Composite is rocketing, the MSCI China index and Hong Kong’s Hang Seng are posting more pedestrian gains. [...]

GDP slows dangerously

There are signs that China’s economy is losing steam. But while this is nothing new, the trend is starting to worry us. GDP rose 7.3% in the fourth quarter of 2014, in line with the pace observed earlier in the year but down sharply from the stellar performances chalked up in the previous decade (see left-hand chart below). Although the hasty compilation of GDP has left many analysts doubting the accuracy of the Q4 2014 data, on the face of it these confirm that the government is reining in economic growth according to plan.

Beijing’s strategy is to rebalance activity in China, by weaning the economy off exports and promoting domestic demand instead. In practice this means pursuing structural reforms while providing targeted stimulus so as to limit the risk of a hard landing. If the government is successful, annual GDP growth should steady at around 7% this year. At that pace the Chinese economy would not be destroying jobs and social stability could be preserved. But just how well the authorities are succeeding in their drive towards this objective can be questioned. [...]