Chinese Economy Strengthening

Copyright © 2009, Greenwich Financial Management Inc., a registered investment advisor.
Measures of industrial production have begun to increase in China in the first quarter of 2009. The index of manufacturing has shown strength. Demand for oil and raw materials such as iron ore is picking up. Stocks have also rallied broadly. The Shanghai Stock Exchange Composite Index, which fell to about 1700 in mid-November, is currently around 2500, almost a 50% gain—though far below its high of over 6,000 in October of 2007.

However, exports remain weak, which could imply that inventories will build up. To improve domestic demand and reduce reliance on exports, the government is promoting rural purchase of appliances such as televisions and refrigerators. It is also extending the rudimentary social safety net, including expansion of medical insurance.

According to Xeng Xinli, deputy policy research head of the Communist Party, Chinese exports may fall by 10% this year, endangering the official growth target of 8%. China has embarked on a massive 4 million RMB (approximately $585 billion) stimulus package. The package emphasizes infrastructure development and education. China is now considering additional fiscal and tax stimulus measures. China Mulls New Stimulus to Boost Consumption, Bolster Recovery - Bloomberg.com

To be sure, China is not adding to its international reserves at the massive rate it has been experiencing in the last few years. According to the Central Bank of China, reserves increased by only $7.7 billion in the first quarter of 2009 versus $153.9 billion in the same period of 2008. A shift in the balance of trade was one factor, but capital flight by foreign investors in China probably played a larger role. However, there are signs that capital is flowing back toward China, as the sense of crisis eases. The trend is favorable, as “Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March.” China Slows Purchases of U.S. and Other Bonds - NYTimes.com.

Premier Wen Jiabao made remarks several weeks ago indicating China was worried about the “safety” of its huge investment in US obligations; since that time, there has been heightened concern by US Treasury investors and traders about Chinese intentions. The numbers suggest that even without any prejudice against dollar assets, China’s need to buy foreign obligations will be much less this year.

One way to get invested in China is through the Matthews China Fund (ticker: MCHFX), which has almost $900 million in assets and a long-term track record. It is lead managed by Richard Gao. On April 13th, it closed with a net asset value of $16.34 per share.

Note: Clients advised by Greenwich Financial Management Inc. may hold long or short positions in securities mentioned in this article or in derivatives of those securities. The author of this report has no personal holdings or interest in the referenced investments and has received no compensation for providing the above research from any of the listed companies. The information is not sufficient by itself to make an investment decision. The suitability of such investments for particular individuals has not been assessed.

Andrew Szabo CFA is managing director of Greenwich Financial Management Inc., a registered investment advisor. Questions call 917-796-8500 or e-mail Szabo@GreenwichFinancial.com). For more information, please visit http://greenwichfinancial.com/.