Quam - China may slow down before Olympics

China Might Slow Down Way Before The Olympics 2007-11-23 14:31:14 Quam (IA) Limited

It came much sooner than we thought: production growths of major industrial products already began to decelerate in the third quarter this year & continued in October. Even though Q3 GDP figure has not been announced yet, more likely than not, GDP growth also decelerated. One does not even need to wait until the Olympic Games !

          Q1.07         Q2.07         Q3.07     October 07

Fe ore:     138Mt        184          184         59.8
          +33.9%YOY    +26.2%       +13.3%      +13.6%

Cement:     242Mt        377          366         124
          +14.5%YOY    +17.0%       +13.4%      +9.8%

National Bureau Of Statistics

It is now clear that the popular misconception of "China will not curb things down before the Olympic Games" is perhaps the stupidest thought ever in investment.


Adding to the woe, there are austerity measures targeting property development & property speculation like raising bank reserve ratios & interest rates in order to suppress loan growth, the ultimate austerity measure is the good old political order of stopping banks from issuing loans altogether, so that loan balance by the end of 2007 will not exceed the balance as at end of October.


The Chinese nominal economic growth cycle that began in late 2005 at about 10%YOY more likely than not peaked in mid 2007 at a whopping 16%; the down-cycle will probably see nominal economic growth decelerating to some 12% or even 10% by late 2008 or early 2009. The cyclical sectors, such as property development, cement, metals, steel, building materials, trucks, dry bulk shipping?etc, & large banks with poor asset quality, will be hit hard. Chinese insurance companies, given their inordinately high dependence on lucky A share trading profits, will also be struck a very heavy blow.


The Shanghai A share index, now at about 5,239, is traded at a 2007 estimated P/E of a very dear 40.8 times; & do not forget that part of the earnings is inflated by lucky A share trading gains, especially the insurance companies. Even if aggregate profits of index constituents will gain only 20% per year in 2008, & if the A share market wakes up to the harsh reality & award equities a 2008 valuation of a still very, very generous 25 times 2008 earnings, then the index will still collapse to 3,216, down a painful 38.7% from current level, & bear in mind that equities of cyclical industries & insurers might plunge much more than that. But at the other extreme, there is also a small chance for the market to over react so that 2008 valuations of cyclical companies might be too depressed even if 2008 earnings will fall.


As Quam worried not too long ago, when hard working was seen not as a virtue but folly, when it was so easy to make money, then hardship could be just around the corner.
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