You are here: cherry > Press releases for October 2011 > Christina Chung, Senior Portfolio Manager, Allianz RCM China Fund, gives her latest market outlook

25 October 2011

"We maintain our view that the risk of a hard landing is not high in China. Of course, it depends on the definition of hard landing, which we would consider as real GDP growth collapsing to 5-6% in the short term. In China, there are many domestic issues that the central government needs to deal with, but these issues are not the same kind of structural issues facing the US and certain European countries at present. China is not burdened with external debt, has large foreign exchange reserves, high domestic savings, controlled currency and largely closed capital account which all suggest that there will be no forced currency devaluation by hedge funds or capital flight by domestic citizens which typically drives a downward spiral at times of crisis. "We believe that real GDP growth will moderate and the slowdown is largely policy engineering including the tightening of credit and other property market tightening measures. Therefore if economic growth decelerates sharply, there is room for policy relaxation including expansionary fiscal policies, such as an increase in government spending on infrastructure, a reduction in required reserves ratio as well as some easing of bank credit particularly to SMEs on the heels of the tightening of banks' off balance lending. We do not expect an interest rate cut at this point in time. Our forecast on real GDP growth will be at 8-9% in 2011 and this will slow to 7-8% in 2012. "For corporate earnings, we expect that there will be some deterioration given the slowdown in the Chinese economy and more importantly, a sharp decline in the global economy. However, the market appears to have already discounted this earnings uncertainty given the sharp PER de-rating of Chinese stocks. Price-to-book is a better valuation parameter at times of panic selling. In terms of price-to-book, MSCI China and H-shares are already well below the 2008/2009 crisis level. Hence, we believe that the market is oversold and share prices have discounted a lot of potential negatives. Valuations are very cheap, and it is now more a question of market confidence. "Europe is the single largest trading partner with China and the top importer of Chinese goods and services. Hence, the worsening European sovereign debt crisis will definitely have an impact on the Sino-EU economic and trade cooperation, which may result in slower export growth in China. However, economic downturn in Europe could drive an increase in outward investment by European companies to emerging economies including China. In addition, China continues to have strong demand for capital goods to enhance production quality and improve production process in the face of rising labour costs. Hence, a weak euro will help to reduce the cost of these capital goods imports. Furthermore, domestic consumption in China should remain relatively resilient which will help to underpin Chinese economic growth. "Nevertheless, Chinese economic growth will inevitably slow which could also be a blessing in disguise from the perspective of easing inflationary pressure. In fact, a weak euro and the rebound of the US dollar, coupled with a slowdown in demand for commodities in the face of a downturn in global economic activity will all help to ease inflationary pressures on China. In terms of exports, emerging markets and Asia are increasingly representing a larger share of the global export market. Hence, intra-regional trade could provide support at a time when the US and European export markets slow. "In a scenario of global recession, China will be adversely affected. However, we expect that the Chinese government would introduce policy support to avert a hard landing scenario in the event of global recession."

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