China Construction Cos Default Trumps Positive Economic Data

Apr 1 2014, 4:03pm CDT | by

China Construction Cos Default Trumps Positive Economic Data
Photo Credit: Forbes Business

China’s official purchasing managers index came out on Tuesday over 50, following back to back declines.  But a new default today trumped any positives in the market.  The iShares FTSE China (FXI) exchange traded fund rose just 0.34%, underperforming the MSCI Emerging Markets Index by nearly 90 basis points.

The good news came in the form of China’s PMI index tracking above 50 for the first time this year.  That is surely better than a decline, but investors are not getting too excited as credit problems trump all.

The National Bureau of Statistics said PMI rose to 50.3 in March, the first increase since November, beating consensus estimates of 50.1. The increase was led by the PMI for large enterprises, which rose to 51 in March from 50.7 in February.  China’s economy is moving like a tortoise. And as the credit crisis unfolds, the Central Bank will likely get tighter with bank lending.

Nevertheless, the headline reading beat the HSBC PMI which fell to 48 in March from 48.5 in February.

Jian Chang, an economist for Barclays Capital in Hong Kong, said official PMI gives a better picture of overall economic conditions because of its greater sample size: 3,000 companies versus about 420 in the HSBC survey.  ”It is also noteworthy that the improvement in the NBS PMI came about despite the drag from domestic restructuring efforts – as the government tries to reduce excess capacity in five major industries,” Chang said.

Today’s PMI data should come as a relief for policymakers, as it suggests that the economy is not slowing as quickly as earlier data indicated.

Last week, Premier Li Keqiang said that the government has policies ready to counter any volatility this year, as well as the capability to maintain growth in a reasonable range. As it is, investment banks have been reducing their growth forecasts.  China International Capital Corporation, one of the largest investment banks in China, lowered their growth forecast to 7.3% from 7.6% last week.

Beijing is going to take more action to stabilize growth while also being mindful of credit defaults, which averaged one per week last month — from the overbuilt steel sector to real estate and the first-ever bond default by a Chinese company, Chaori Solar Energy. The maker of solar cells and panels defaulted on a $15 million coupon payment to bond holders in mid-March.

Then on Tuesday, another default was reported, this time in the junk bond space when Xuzhou Zhongsen Tonghao, a manufacturer of construction materials defaulted on a $29 million bond, according to a report in The 21st Century Business Herald, a financial newspaper based in Guangzhou.

Since mid-March, investors have expected the government to accelerate planned investment projects and roll out stabilization measures to ensure its “bottom line” for 7.4% growth is achieved.  However, the government will have to be careful with fixed asset investment going forward. It cannot afford more overcapacity in sectors as diverse as solar and construction if the one-year old Keqiang government is to build a sustainable economy.

China won’t let its economic growth slip too fast and has been successful at avoiding at hard landing, according to the front-page forecast in the March 28 edition of The Kiplinger Letter. 

Odds favor a 7.2% to 7.5% expansion this year, down from 7.7% last year. That’s not slow enough to damage the U.S. economy, shaving just a tenth of a percentage point from GDP, at most. Other countries — mainly commodity exporters — will be less fortunate.

Looking ahead, Kiplinger forecasts slower economic gains in China.  By 2020, a pace of 6% to 7% a year is likely as the Chinese economy matures.

See: Another Default In China As Construction Company Misses Bond Payment – The New  York Times

What Do Chinese Defaults Mean To Chinese Financial Markets? – CFA Institute

China’s Central Bank Battles Bubbles – Bloomberg Businessweek/>/>


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Source: Forbes Business


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