China: Disaster or Adjustment?

The tension is high on Asian stock markets and not for the data that will be transmitted from China on Tuesday the 19^th of January.

Traders have their eyes set on the Chinese macroeconomic data that will be published earlier this week: first the GDP of the fourth quarter and then the industrial production on an annual basis in December as well as retail sales and Fixed Assets Former Rural YTD.

If China’s GDP will be below expectations, surely we would witness a wave of sell-off. Many companies in recent days have launched alarms, inviting every trader to sell their Chinese stocks before the next disaster strikes.

We report what was said by the Royal Bank of Scotland (RBS) in a client note: ‘Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small’. ‘RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis’ as the Telegraph reported on Monday.

After spending 35 years with a growth rate of about 10% per year, China had to begin to deal with a severe housing crisis first and then to the heavy stock crash. The greatest fear of China is in fact the flight of capital of foreigners, which would only make things worse.

Chinese stock exchanges, despite the few gains of this week, closed to a minimum of three years and a half. Yesterday, before the opening of the Asian stock markets, the Asian country published the data on new loans issued by its banks in December.

In total, the banks in China have lent a total of 597.8 billion Yuan ($ 90.6 billion). It is surely less than the 708.9 billion Yuan issued in November.

According to analysts, this highlights the suffering of small and medium Chinese companies that are no longer able to get loans easily.

All this led to reciprocate Asian stocks in utter despair. This week the Nikkei lost 3.1% and the MSCI closed the lows of June 2012 losing 0.7%. Both the Shanghai Composite and the Shenzhen Composite ended the session in red respectively at -3.5% and -3.4%.

The Chinese central bank has already taken action to strengthen the Yuan against ‘foreign attacks’, reducing the spread between onshore (CNY) and offshore (CNH) Yuan around 560 points. The People’s Bank of China (PBOC) alternating currency devaluations and major buying in Chinese Yuan, it is trying to stabilize its currency.

What is clear, however, from the majority of the analysis is that it is not a full-fledged crisis, rather than a slowdown.

Consumer spending has fallen but is normal, inflation is fairly stable, the foreign direct investment are growing although fixed capital domestic investments remain stable. As stated by the Minister of Finance of China, public spending could increase by 10% in order to give benefit to the real economy; import-export is improving in recent months thanks to the political of stabilization of the Chinese currency implemented by the PBoC.

So, there will be a disaster or it is just an adjustment? The only thing to do is to wait and see what will happen.