Investors have turned bullish on the United States and are less bullish—if not actually bearish so far– on China, according to a Bloomberg survey of subscribers.
Investors who have been waiting for a buying opportunity in China and other emerging markets may be about to get their chance.
62% of survey participants called China a bubble and while about one-third said China offered the best investment opportunities over the coming year that was down from October when 44% ranked China as best.
Investors now rank China in a virtual tie for first place with Brazil and—surprise—the United States. That’s a huge turnaround for the United States. In October a majority were pessimistic about the outlook for the United States. Now almost 60% are optimistic.
I don’t think you have to look very hard to find the reasons for the shift in sentiment from China and toward the United States.
Investors are clearly worried that recent moves by the Beijing government are just the beginning of a campaign to rein in money supply growth and to put the brakes to runaway bank lending.
In the first two weeks of January Chinese banks extended $161 billion in new loans. That pace is equal to annual lending of $4.4 trillion or about four times the $1.1 trillion target for new loans in all of 2010 set by the Chinese government.
The early surge in bank lending has turned what was a worry that too much lending would overheat the economy and lead to speculative bubbles in real estate and stocks into a crisis and has led the Chinese government to take steps to reduce lending far earlier than investors had anticipated.
Today’s announcement that the economy grew by 10.7% in the fourth quarter—pushing annual growth up to 8.7%, above the government’s 8% target for 2009—increases the odds that the steps announced so far won’t end the tightening.
Look at what the government has done to put the brakes on lending just in January.
On January 7 the People’s Bank of China raised the interest rate that it pays banks on money they keep on deposit at the central bank. That’s a way to encourage banks to park their cash with the central bank rather than put it into new loans.
On January 12 government regulators ordered state-owned banks to put more money aside as reserves against bad loans. That move was expected by many analysts but not until the second quarter of 2010.
And then yesterday, January 20, the Bank of China and the Agricultural Bank of China announced that they had issued orders to local branches to stop issuing loans to corporate customers without explicit approval from headquarters. The move was a response to “guidance” from the China Banking Regulatory Commission imposing lending quotas and warning the most aggressive lenders to put a temporary halt to new lending.
Analysts who spend their time pouring over the exact wording in government statements in search of clues to the direction of monetary policy say that the language of the government’s announcement of fourth-quarter 10.7% growth in GDP points to further efforts to reduce lending. Until today’s statement government statements had included words promising a “moderately loose monetary policy” and a “proactive fiscal policy. Those words were absent in yesterday’s written announcement. They had also been omitted by Premier Wen Jiabao in a January 19 report on the state of the economy. Analysts see the new wording—or the omission of the old wording—as a trial run at a new policy slogan that will be finalized at the National People’s Congress in March.
Worries that efforts to rein in lending will slow the Chinese economy—or at least puncture bubbles in real estate and stocks—have shaken Chinese stocks. The Shanghai Composite Index was down 2.9% January 20. The index climbed 0.2% on January 21 on the GDP news. Hong Kong’s Hang Seng Index followed a January 20 decline with another drop on January 21. The index fell 2% to its lowest close since October 6, 2009 and is now down 4.6% for 2010.
Other emerging markets have followed Chinese stocks down. Brazilian stocks have been falling in lockstep and the MSCI Emerging Markets Index is down 2.3% in two days as of 1.10 p.m. in London.
A 2% to 4% decline isn’t yet the buying opportunity that many investors have been waiting for. But I don’t think the decline is done and patient investors may get the opening that they been waiting for.
jim, what do you think about Baidu ? is it already ridiculously too high or if google is out of china bidu will be the king of the chinese net ?
I wish Ambev would go down. It’s still around 99. I want to buy some shares, but not at 99.
I’m going to do one more post today on the issue of patience and why I think that waiting into next week is a good idea. That said, I don’t think there’s anything wrong with nibbling here. I bought 50 of DGW today, for example. BRF is now down about 6% from where I sold it back in December. I think it will fall some more but you can nibble here. A 10% decline from the December price would be great to catch but remember that you can try to cut this too fine. The perfect is the enemy of the good in investing too.
Seaturtlelady, don’t know about yesterday but today’s selling has been heavily institional
It doesn’t take much to make the herd stampede now-a-days. Our antagonistic president has caused a major reaction from the big boys who are probably the most sensitive to banking news. Good news could reverse this quickly. Hard to short on political rethoric. Volatility is high and technicals are inconsistant. I’m holding a few tech favorites but otherwise waiting for more stable environment.
Thanks Ed…appreciate the help! I was curious if the sell off yesterday was primarily individual investors like ourselves or institutions?? I’m a “newbie” to investing, so I may not even be asking the question correctly using the term institutions!
Seaturtlelady,
Not really, but if you have a question, feel free to ask it in the comment section here.
Claymore/Alpha Shares China Small Cap (HAO) is a fairly new ETF that seems to be similar to BRF.
In going back through Jims articles on MSN, I see that something very very similar was happening in China (And Jim was talking about it) in 2008 durring the Olympics:
http://articles.moneycentral.msn.com/Investing/JubaksJournal/RootForChinaToWinTheOlympics.aspx
I call your attention to the last paragraph on page 3
My question is this, are we any closer (Or are we looking into the abyss) of the results of too loose a monetary policy (for many many years) in China ?
Is this where the bubble burst Jim?
“The policies of monetary discipline are in the long-term interest of China and the global economy . Contained inflation in China will make it easier for the rest of the world’s countries to avoid the nasty medicine of recession to cure inflation in their own economies. Growth that’s high but not out of control could keep commodity prices climbing while avoiding sharp increases that might make it impossible for many companies to operate at a profit.
And anything short of runaway growth makes it more likely that the train will stay on the tracks and that the world won’t have to relive something like the Asian currency crisis of the late 1990s. The policies of China’s growth faction, on the other hand, are unsustainable in the long run. They would result in a China bubble that would burst one day.“
“The trouble is that China faces skyrocketing inflation that began long before workers put the first piece of rebar into wet concrete at the “Bird’s Nest,” the fitting nickname for the main Olympic stadium in Beijing. The overruns that have pushed the cost of the Beijing games to $38 billion and counting haven’t helped domestic inflation. China’s consumer prices climbed 7.9% in the first half of 2008 from the first half of 2007, according to the National Bureau of Statistics. That’s just a slight decrease from the 8.7% inflation rate recorded in February — the highest in 12 years.”
And
Trying to tame inflation
Among the factors driving inflation are the soaring costs of oil and other imported raw materials, food prices that are higher around the globe and government policies that pumped a flood of cash into the Chinese economy.
China’s money supply climbed 18.1% in May from a year earlier. That additional money — most of it the result of a decision to keep the Chinese currency, the yuan, at an artificially low level to protect Chinese exports and Chinese jobs — fueled the boom in Chinese stocks that preceded this year’s 50% correction, the boom in Chinese real estate that’s only recently started to flag and the almost 8% inflation in the first half of 2008.
This inflation and the speculative fever in the stock and real-estate markets isn’t the result of the national government doing nothing. The government has fought inflation more actively than I imagined possible in my May 1, 2007, column, “Why China can’t slow down.” For example, the central bank raised bank reserve requirements to 17.5% in June. That means a bank has to keep reserves in its vault equal to 17.5% of the money it lends out. That’s 17.5% of bank capital that isn’t heating up the economy and fueling price and asset inflation. And it’s the highest reserve requirement in China’s history. Government banking regulators have also put pressure on banks to tighten their lending in the mortgage market in an effort to avoid a U.S.-style financial meltdown like the one that sucked in Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs).
It’s not clear whether these policies have had much effect so far on inflation. Yes, it fell from 8.7% in February to 7.1% in June, but that may be quickly reversed if oil prices start to climb again. But it has had an effect on economic growth. The growth of China’s economy, as measured by gross domestic product , has declined from 11.3% in the fourth quarter of 2007 to 10.6% in the first quarter of 2008 to 10.1% in the second quarter. Slower economic growth often translates into lower inflation, although the huge amount of short-term hot money currently flowing into the country may disrupt that connection.
Now, 10.1% may seem like great growth to anyone living in a U.S. economy struggling to get even 2% growth, but the drop is too much for what I’d call the growth party in China’s government and business sectors . (To a great degree, those are one and the same in the Chinese economy.)
This faction has been increasingly vocal lately. Its arguments: The slowdown has gone too far. The government needs to prop up stock and real-estate prices. The central bank needs to do more to fight any appreciation in the yuan, since currency appreciation is pricing Chinese exports out of the market.
This group has won some victories; most noticeably the rollback of a tax on shares that temporarily supported stock prices, but for most of 2008, what I’d call the party of monetary discipline has won out.
The policies of monetary discipline are in the long-term interest of China and the global economy . Contained inflation in China will make it easier for the rest of the world’s countries to avoid the nasty medicine of recession to cure inflation in their own economies. Growth that’s high but not out of control could keep commodity prices climbing while avoiding sharp increases that might make it impossible for many companies to operate at a profit.
And anything short of runaway growth makes it more likely that the train will stay on the tracks and that the world won’t have to relive something like the Asian currency crisis of the late 1990s. The policies of China’s growth faction, on the other hand, are unsustainable in the long run. They would result in a China bubble that would burst one day.
And having been invested through the 2000 dot-com bubble and the 2007 real-estate bubble, I’m very sure I can do without another one anytime soon.
Jim,
In one of your recent (2008) past MSN articles, you asked:
How to share in the dollar’s surge
Jubak’s Journal9/5/2008 12:01 AM ET
“Do you put your money back into US stocks? Or use the dollar’s new buying power to snap up commodities and overseas investments? It depends on how much time you have.”
http://articles.moneycentral.msn.com/Investing/JubaksJournal/How-to-share-in-the-dollars-surge.aspx
With the recent rumblings out of China, do you still believe that the Dollar is going to continue down?
You say in this Jubakpicks Blog that a buying opportunity in China may be coming up, that would seem to imply that you believe that the argument stated in your 9/5/2009 post remains intact.
Or, is it time to look local (Us markets) ?
bsorge: PGJ is an ETF with heavy-duty Chinese companies. Jim is generally recommending consumer oriented Chinese companies. MCHFX is good but it is a mutual fund. Is there a ETF that could accomplish this, like BRF? Thanks.
I just bought 2000 shares of PGJ @ below 24.- which I thinki is good value for a wide array of chinese companies
Guys, is there a site that ya’ll hang out on to ask and answer questions about investing?
Regarding China, there’s a phrase that comes to mind: “good problem to have”.
Jim, I reiterate Shameus’ question regarding BRF. I exited BRF along with you as I agreed with your logic from your featured article. By patience, do you mean sit back and see how the Chinese tightening unfolds? Will you let us know when you are ready to buy back in to BRF? BHP in Australia is also getting clobbered. Please keep us posted on your opinions regarding an entry point here as well…
Jim, I wonder if you might suggest entry point ranges for the funds you’ve mentioned before EEM, BRF, or even stocks like DGW or CTRP? In other words, what kind of patience is demanded?
Great! China is trying to put the breaks on its overheated economy just as we cannot decide whether we are having a double-dip or one long recession (if you don’t count the stimulus effect).
http://www.ritholtz.com/blog/2010/01/nber-intrigue-2/
I have been waiting for buying opportunity too. China, Brazil, Indonesia, Turkey. Even Malaysia, Singapore, Taiwan and S Korea.
Jim, you recently mentioned EEM. How do you think in comparison to VWO?
Definitely looking or some buying opportunities. One of the big ones on Jim’s 50 is ITUB. IT is approaching being down 20% from intraday high. I originally bought shares at 16.75 and will add if it breaks under 20. Jim what do you think of that entry point?