CHINA LOOKS OVER-COOKED RIGHT NOW
DAVID MORRISON
SENIOR DERIVATIVES TRADER, GFT
YESTERDAY saw the result of the first Chinese initial public offering (IPO) in over a year since Chinese regulators suspended IPOs in September 2008 after worries that too many companies were anxious to tap investors for funds. And what a success the debut was.
On the first day of trading in Sichuan Expressway Co, the stock was suspended twice as it soared 300 per cent above its issue price, but pulled back for a gain of over 200 per cent on the day. Tomorrow China State Construction Engineering lists its shares in Shanghai, and another frenzied debut is expected.
But this equity market fairytale could prove to be short-lived. Even before global stock markets slumped it was apparent that Chinese companies were producing and selling goods at below cost in order to build up market share and boost employment.
And in order to fuel that boom, Chinese banks were lending at a tremendous rate and many of these loans have not been repaid.
Now exports are down sharply, with the US consumer and other Western markets unable to mop up production, while domestic demand is not strong enough to pick up the slack.
Yet China managed to post GDP growth of 7.9 per cent in the second quarter of 2009, a fraction less than the 8 per cent target and strongly up from 6.1 per cent in the first quarter.
But given that exports have fallen, where is this growth coming from?
It is being driven by the stimulus package, which is worth an eye-watering 4 trillion yuan ($586bn), which is equivalent to one third of the country’s GDP. And as we found out to our cost here, cheap and easily available credit often leads to poor investment decisions.
We should not bank on China pulling the world out of recession any more than China can rely on consumption from the developed world to keep its growth rate up at 8 per cent.
In the long term, China represents superb opportunities but right now it looks overcooked. If you already have exposure then hopefully you have a cushion if the market corrects. If you’re thinking of investing now, then make sure it’s with money you can afford to lose.