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“Signs of a Bottom” in China
January 7, 2009
Finding positives in China’s struggling economy is not easy work, but CLSA’s Andy Rothman has spotted a small one.
In his latest “Sinology” research note, Rothman says he was “pleasantly surprised” to see a slight uptick in China’s Purchasing Managers’ Index, which shows the “tentative signs of a bottom.”
The December PMI is below 50, which indicates worsening conditions, but it’s not as bad as the November reading. Rothman says the tiny uptick came much earlier than expected. “We have not been expecting the data to improve until March or April,” he said.
Industrial profit growth fell 30 percent in the three months ending with November compared to the previous three months, but Rothman sees a light at the end of the tunnel for industrials like steel and cement producers. These companies stand to benefit from the $586 billion stimulus plan announced in December. The effects of the stimulus should start to show up in the economic data around the end of March or the beginning of April.
Perhaps the biggest threat to China’s recovery is increasing expectations. Many think China will lead the world out of recession and the fallout could be severe if China doesn’t recover.
The country’s leaders have shown that they will act quickly to prevent that from happening. China was the first to respond to falling markets by cutting interest rates and it was also the first to enact a broad stimulus plan.
Rothman sees it as a reason for optimism that “Beijing continues to take new steps designed to boost domestic consumption and investment” and he expects a “steady flow of such measures in the coming months.”
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment..